AEGON N.V. IS THE HOLDING COMPANY OF ONE OF THE WORLD’S LARGEST LISTED INSURANCE GROUPS RANKED BY MARKET CAPITALIZATION AND ASSETS. THE AEGON GROUP HEADOFFICE IS IN THE NETHERLANDS AND EMPLOYS ABOUT 28,000 PEOPLE WORLDWIDE. AEGON’S BUSINESSES FOCUS ON LIFE INSURANCE, PENSIONS, SAVINGS AND INVESTMENT PRODUCTS. THE GROUP IS ALSO ACTIVE IN ACCIDENT AND HEALTH INSURANCE, GENERAL INSURANCE, AND HAS LIMITED BANKING ACTIVITIES. AEGON’S THREE MAJOR MARKETS ARE THE UNITED STATES, THE NETHERLANDS AND THE UNITED KINGDOM. IN ADDITION, THE GROUP IS PRESENT IN A NUMBER OF OTHER COUNTRIES INCLUDING CANADA, CHINA, HUNGARY, SPAIN AND TAIWAN. AEGON’S BUSINESSES ENCOURAGE PRODUCT INNOVATION AND REWARD VALUE CREATION THROUGH A DECENTRALIZED ORGANIZATION AND ENDORSE A MULTI-BRAND AND MULTI- CHANNEL DISTRIBUTION APPROACH. NEW PRODUCTS AND SERVICE INITIATIVES ARE DEVELOPED BY LOCAL BUSINESS UNITS, WITH A CONTINUOUS FOCUS ON COST CONTROL, USING TAILORED DISTRIBUTION CHANNELS TO MEET CUSTOMERS’ NEEDS. AEGON GROUP ANNUAL REPORT 2003 1 STRATEGY COMMITMENT TO CORE BUSINESS Insurance with a strong emphasis on life insurance, pensions, savings and investment products. AEGON focuses on the financial protection and asset accumulation needs of its clients. DECENTRALIZED ORGANIZATION Multi-domestic and multi-branded approach, giving a high degree of autonomy to the management of the individual country and business units, encouraging entrepreneurial spirit and action. AEGON requires local management to run local businesses. EMPHASIS ON PROFITABILITY Long-term average growth of net income of 10% per annum; the minimum return on investment is set to earn adequate returns well in excess of the cost of capital on the pricing of new business and acquisitions. Divestments of non-core activities and underperformers and disciplined expense management are key to the achievement of these objectives. MARKET POSITION AEGON’s objective is to achieve a leading position in each of its chosen markets in order to generate benefits of scale. INTERNATIONAL EXPANSION AEGON supplements its autonomous growth with selective acquisitions and partnerships, which are preferred in countries where AEGON already has a presence in order to build scale and enhance distribution.
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AEGON N.V. IS THE HOLDING COMPANY OF ONE OF THE WORLD’S LARGEST LISTED
INSURANCE GROUPS RANKED BY MARKET CAPITALIZATION AND ASSETS. THE AEGON
GROUP HEADOFFICE IS IN THE NETHERLANDS AND EMPLOYS ABOUT 28,000
PEOPLE WORLDWIDE.
AEGON’S BUSINESSES FOCUS ON LIFE INSURANCE, PENSIONS, SAVINGS AND INVESTMENT
PRODUCTS. THE GROUP IS ALSO ACTIVE IN ACCIDENT AND HEALTH INSURANCE, GENERAL
INSURANCE, AND HAS LIMITED BANKING ACTIVITIES.
AEGON’S THREE MAJOR MARKETS ARE THE UNITED STATES, THE NETHERLANDS AND
THE UNITED KINGDOM. IN ADDITION, THE GROUP IS PRESENT IN A NUMBER OF OTHER
COUNTRIES INCLUDING CANADA, CHINA, HUNGARY, SPAIN AND TAIWAN.
AEGON’S BUSINESSES ENCOURAGE PRODUCT INNOVATION AND REWARD VALUE CREATION
THROUGH A DECENTRALIZED ORGANIZATION AND ENDORSE A MULTI-BRAND AND MULTI-
CHANNEL DISTRIBUTION APPROACH. NEW PRODUCTS AND SERVICE INITIATIVES ARE
DEVELOPED BY LOCAL BUSINESS UNITS, WITH A CONTINUOUS FOCUS ON COST CONTROL,
USING TAILORED DISTRIBUTION CHANNELS TO MEET CUSTOMERS’ NEEDS.
AEGON GROUP ANNUAL REPORT 2003 1
STRATEGY
COMMITMENT TO CORE BUSINESS
Insurance with a strong emphasis on life insurance, pensions,
savings and investment products. AEGON focuses on the financial
protection and asset accumulation needs of its clients.
DECENTRALIZED ORGANIZATION
Multi-domestic and multi-branded approach, giving a high degree
of autonomy to the management of the individual country and
business units, encouraging entrepreneurial spirit and action.
AEGON requires local management to run local businesses.
EMPHASIS ON PROFITABILITY
Long-term average growth of net income of 10% per annum; the
minimum return on investment is set to earn adequate returns
well in excess of the cost of capital on the pricing of new
business and acquisitions. Divestments of non-core activities
and underperformers and disciplined expense management
are key to the achievement of these objectives.
MARKET POSITION
AEGON’s objective is to achieve a leading position in each of its
chosen markets in order to generate benefits of scale.
INTERNATIONAL EXPANSION
AEGON supplements its autonomous growth with selective
acquisitions and partnerships, which are preferred in countries
where AEGON already has a presence in order to build scale and
enhance distribution.
AEGON GROUP ANNUAL REPORT 2003 2
AT A GLANCE
FINANCIAL RELATIONS
AEGON values the many relationships with the global
investment community and is committed to the highest
standards of integrity and fair disclosure.
The international business activities of the company are
reflected in the geographical diversity of AEGON’s investor
base. To ensure efficient and effective access to the global
capital markets, AEGON’s common shares are listed on the
stock exchanges in Amsterdam, Frankfurt, London, New York,
Tokyo and Zurich. In addition, the company’s stock is included
in many major equity indices.
AEGON strives to continuously improve as an investor
friendly company. In 2003, AEGON disclosed its embedded
value analysis for the first time and provided more detail than
most of the disclosure in the market. The analysis is used by
the financial community to better understand AEGON’s
businesses and the value the company creates. The group also
strengthened its financial communications by combining the
investor relations and corporate communications departments.
AEGON is focused on ensuring that both financial and non-
financial information is disclosed accurately, completely, timely
and in a consistent fashion.
AEGON is committed to ensuring investors receive an
accurate portrait of the company’s performance and prospects.
To achieve this, AEGON has developed an active investor
relations program that focuses on providing investors around
the world with the information required to make sound
investment decisions. This includes information on key factors
that drive AEGON’s businesses and influence its results,
financial condition and value. AEGON actively maintains
contact with the financial community through many mediums,
including investor roadshows, webcasts, press releases and
investor days, whilst ensuring equal access to information.
AEGON invites current shareholders, members of the
financial community and potential investors to learn more
about AEGON as an investment. Dedicated staff are available
to answer questions and to maintain an open dialogue between
AEGON and the financial community.
SHAREHOLDER BASE AEGON N.V. COMMON SHARESin percentage (estimated)
FROM THE BOARDAEGON HAS DEMONSTRATED RESILIENCE AND IS WELLPOSITIONED TO TAKE ADVANTAGE OF A RETURN TO A MORE STABLE MARKET ENVIRONMENT
AEGON GROUP ANNUAL REPORT 2003 5
AEGON GROUP ANNUAL REPORT 2003 6
CHAIRMAN’S LETTER
Dear reader,
On behalf of the Executive Board, I am pleased to present AEGON's 2003 annual
report. Following a year that challenged the insurance industry as a whole, AEGON,
demonstrating its resilience, performed well in 2003. We are well-positioned to take
advantage of a return to a more stable market environment.
Financial results for 2003 demonstrated the overall progress that has been made during the
year. Full year earnings and life production showed good growth. Furthermore, the divestiture of
most of Transamerica Finance Corporation’s business reinforced our focus on core life activities.
The principles of our strategy and objectives are clear. AEGON will continue to focus on life
and pension products in both its existing and selected new markets. We are committed to a
decentralized structure that provides substantial autonomy for local operations, enabling all our
businesses to organize themselves around the demands of their customers. We will seek a
leading position in each of our chosen markets to generate benefits of scale, combined with
profitable and sustainable growth.
Distribution continues to be the cornerstone of AEGON’s overall business. Significant
progress was made during the year in expanding our multi-channel distribution systems.
While multi-channel distribution has been a particularly important growth driver in the United
States and Taiwan, it has also become an increasingly important aspect of distribution activities
in our other country units. 2003 not only saw the expansion of AEGON’s distribution channels
in the United States, but also the acquisition and integration of a number of brokers in the
Netherlands and independent financial advisor firms in the United Kingdom.
DONALD J. SHEPARD
CHAIRMAN OF THE
EXECUTIVE BOARD
The Hague, March 1 1, 2004
AEGON GROUP ANNUAL REPORT 2003 7
Bank distribution partnerships also represent an opportunity to extend our reach and the
partnership with Caja de Ahorros del Mediterráneo, one of the largest savings banks in Spain,
is an important development. We will continue to develop distribution partnerships in those
markets where it makes strategic sense to do so.
I am also pleased to report increased authority of AEGON’s common shareholders as a result
of the modernization of AEGON’s corporate governance. In addition, the recent introduction of
the Dutch Corporate Governance Code is an important step forward in improving the
accountability of companies registered in the Netherlands. AEGON is committed to the highest
standards of transparency and we welcome the adoption of the principles of the code.
Although the continued low interest rate environment and weak US dollar are not helpful,
it will not change the direction of our business. Rising bond yields, combined with lower bond
defaults and the upward momentum of equity markets, as well as growth in the United States
economy, are significant factors that are beginning to have a positive impact on our business.
AEGON has a leading position in an industry that is demonstrating real evidence of recovery
after an unprecedented period of challenges in the financial markets. With focused execution
of our growth strategy, we look to 2004 as a year in which AEGON will create value for all
stakeholders.
Thank you for your support and interest in AEGON. I hope our 2003 annual report proves to
be a valuable resource for you.
Yours sincerely,
Donald J. Shepard
Chairman of the Executive Board
AEGON GROUP ANNUAL REPORT 2003 8
MEMBERS OF THE EXECUTIVE BOARD OF AEGON N.V.
Johan G. van der Werf (1952), Dutch nationality, started
his career in 1973 as an officer in the Merchant Marine. In 1982
he joined one of the predecessors of AEGON as a district sales
manager. From 1987 till 1992 he was chairman of the
management board of Spaarbeleg and in 1992 he became a
member of the management board of AEGON The Netherlands.
As from 2002 he is a member of the Executive Board of
AEGON N.V. and CEO of AEGON The Netherlands.
Alexander R. Wynaendts (1960), Dutch nationality, started his
career with ABN AMRO in 1984 and had several assignments
in Asset Management (Amsterdam) and Corporate Finance
(London). In 1997 he joined AEGON’s Group Business
Development department and was promoted executive
vice-president and head of Group Business Development in
May 1998. In that position he was responsible for Asia. He is
a member of the Boards of AEGON UK, AEGON Spain and
ÁB-AEGON (Hungary). In 2003 he was appointed a member
of the Executive Board of AEGON N.V.
Donald J. Shepard (1946), American nationality, started his
career with Life Investors in 1970. Serving in various
management and executive functions with Life Investors, he
became executive vice-president and chief operating officer
in 1985, a position he held until AEGON consolidated its other
United States operations with Life Investors to form AEGON
USA in 1989. He became a member of the Executive Board in
1992. As per April 18, 2002 he became chairman of the
Executive Board of AEGON N.V.
Joseph B.M. Streppel (1949), Dutch nationality, started his
career in 1973 at one of AEGON’s predecessors in several
treasury and investment positions. In 1986 he became CFO of
FGH BANK and in 1987 he joined the Executive Board of FGH
BANK. In 1991 he became chairman and CEO of Labouchere
and in 1995 also of FGH BANK. In 1998 he became CFO of
AEGON N.V. Since May 2000 he has been a member of the
Executive Board of AEGON N.V.
AEGON GROUP ANNUAL REPORT 2003 9
REPORT OF THE SUPERVISORY BOARD
AEGON GROUP ANNUAL REPORT 2003 9
ROLE OF THE SUPERVISORY BOARD
The duties of the Supervisory Board, which consists currently
of nine non-executive members, are to supervise the Executive
Board’s management and to advise the Executive Board. With
the active assistance of its four specialized committees, the
Supervisory Board prepares nominations, resignations and
the compensation of Executive Board members and discusses
the quarterly results and the accounting principles, dividends,
capital, internal control procedures and risk management, as
well as the corporate strategy. We carried out our responsibilities
in 2003 in close cooperation with the Executive Board, holding
five regular meetings. The attendance at the meetings was
over 95% on average. The meetings were often preceded or
followed by informal meetings and Committee meetings.
During a combined meeting of the Audit Committee and the
Supervisory Board, AEGON’s risk management was discussed
in-depth.
CORPORATE GOVERNANCE
Following our proposal to shareholders that AEGON N.V.
exempt itself from the Dutch ‘large company regime’,
shareholders approved this proposal during an extraordinary
General Meeting of Shareholders held on May 9, 2003. This
proposal had also been on the agenda of the annual General
Meeting of Shareholders held on April 17, 2003, but
shareholders could not decide on this issue during that
meeting because the statutory required quorum was not
represented. Following the decision taken by shareholders on
May 9, 2003, AEGON N.V.’s Articles of Incorporation were
amended on May 26, 2003. The most important changes
concern the appointment of members of the Executive Board
and Supervisory Board and the adoption of the annual
accounts. Henceforth, the authority to appoint members of the
Executive Board and Supervisory Board and to adopt the
annual accounts is vested with shareholders. For further
details about AEGON’s corporate governance please refer to
page 61 and following.
CORPORATE GOVERNANCE CODE
We discussed the draft of the Dutch Corporate Governance
Code following its publication in July 2003. The final version of
the code was published on December 9, 2003 and came into
effect on January 1, 2004. We share the views of the
Committee that drafted the code that the principles and best
practice provisions included therein are reflective of the most
current general views of good corporate governance in
relation to Dutch listed companies. We have given our support
to the implementation of the code within AEGON N.V.
At the annual General Meeting of Shareholders to be held
on April 22, 2004, we hope to engage shareholders in a
discussion of AEGON N.V.’s corporate governance as described
in the corporate governance section of this annual report
(pages 61 and following). This chapter describes in detail the
application of the code by AEGON.
SUPERVISORY BOARD MEETINGS
In accordance with the Board’s Rules and Regulations,
preparatory meetings preceded the regular meetings, attended
by the chairman and vice-chairman of the Supervisory Board
as well as the chairman and the chief financial officer of the
Executive Board. All Executive Board members attended the
regular meetings, held in March, June, August, November and
December 2003. In December 2003, the Supervisory Board
discussed the Executive Board’s and its own composition and
performance, without the Executive Board being present.
The meetings, during which the quarterly and annual
results were discussed, were also attended by the director of
the Group Finance department. Representatives from
M. TABAKSBLAT H. DE RUITER D.G. EUSTACE O.J. OLCAY T. REMBE
W.F.C. STEVENS K.J. STORM L.M. VAN WIJK F.J. DE WIT
AEGON GROUP ANNUAL REPORT 2003 10
REPORT OF THE SUPERVISORY BOARD
Ernst & Young, AEGON’s independent auditor, attended the
discussion regarding the results for 2002. As usual, special
meetings of the Supervisory Board were dedicated to AEGON’s
budget for 2004, to the business strategy and to a management
overview, in order to identify top managers within AEGON
worldwide. The all-day meeting regarding AEGON’s business
strategy was preceded and prepared by the Strategy
Committee. Please refer to page 1 for AEGON’s strategy.
Among the many topics discussed in our meetings in 2003
were embedded value and fair value, dividend policy, capital
management and risk management. We discussed and
supported the Executive Board’s intention to disclose the
embedded value, after which the 2002 Embedded Value Report
was published on August 7, 2003. Following the adoption of the
Sarbanes-Oxley Act 2002 (SOX) by the United States Congress,
risk management has become an even more important issue
for AEGON and after an extensive presentation on this subject
we discussed the measures that AEGON has taken on risk
management.
Attention was also devoted to joint ventures and
divestitures. We approved AEGON’s participation in the
management buy-out of Unirobe, a group of insurance
intermediaries. We also approved the start of a greenfield
insurance operation in Slovakia as well as the partnership
between AEGON and Caja de Ahorros del Mediterráneo, one
of the largest savings banks in Spain. We also approved the
Executive Board’s decision to divest the commercial finance
and real estate tax services’ businesses of Transamerica
Finance Corporation.
We discussed the consequences of SOX for AEGON and
we amended in the light thereof the Rules and Regulations
for the Supervisory Board, the Audit Committee Charter and
the Terms of Reference of the Nominating Committee, the
Compensation Committee and the Strategy Committee. We
also adopted, in line with the SOX requirements, a ‘Pre-
approval Policy’ for the services of Ernst & Young. All these
rules are available on AEGON’s corporate website:
www.aegon.com.
SUPERVISORY BOARD COMMITTEES
The Supervisory Board relies upon four committees to
prepare specific issues for decision-making by the Board.
Each committee has four members, all drawn from the
Supervisory Board.
The Audit Committee, established in 1983, has Mr. Eustace
as chairman and Mrs. Rembe and Messrs. De Ruiter and
Stevens as members. During the year, the Committee adopted
a revised Audit Committee Charter to better reflect the
Committee’s purpose and responsibilities in the light of SOX
and other developments in corporate governance. In
accordance with the revised Charter, the Committee has the
authority to: recommend the appointment or replacement of
the independent auditor, pre-approve all services provided by
the auditor and retain independent advisors, as it deems
appropriate. The Charter also states that the company shall
provide appropriate funding to the Audit Committee for the
payment of compensation to the independent auditors and any
advisor employed by the Audit Committee and that the
Committee shall establish procedures for the receipt and
retention of complaints relating to accounting and internal
control issues. The Audit Committee is comprised of
independent members of the Supervisory Board who are
experienced and competent in financial accounting matters.
The chairman of the Committee, Mr. Eustace, is a financial
expert, in accordance with the requirements of SOX.
The Committee held six meetings during 2003 attended by
the Executive Board members and representatives from
Ernst & Young. The discussions were dominated by its
permanent agenda: the quarterly results, annual accounts and
the auditing of these by Ernst & Young, the actuarial analysis,
AEGON’s Capital Plan and the report on currency exposure,
accounting principles, internal control systems, the Risk
Management Report as well as Ernst & Young’s independence
and fees. The Committee continued its practice in 2003 of
meeting with the internal and independent auditors from
AEGON’s key operating countries. The Committee subsequently
reported to the Supervisory Board on its findings and advised
the Supervisory Board to recommend to the shareholders that
Ernst & Young be reappointed as independent auditor.
It also discussed the consequences of SOX, especially the
independence criteria, for AEGON, the Supervisory Board and
its committees and for the independent auditor. Two meetings,
in March and September, were devoted to AEGON’s filings with
the Security and Exchange Commission (SEC), the annual
report (Form 20-F) and the first six months results (Form 6-K).
The Committee also discussed the SEC’s review following
AEGON’s filings for a shelf registration.
The Committee endorsed AEGON’s decision to implement
an internal audit function at group level and to enhance the
group compliance and risk management function. The
Committee notes with satisfaction the appointment in 2003 of
a new Group Compliance Officer, a Group Risk Officer and a
Group Internal Auditor.
The Compensation Committee, active since 1989, with
Mr. De Wit as chairman and Messrs. De Ruiter, Stevens and
Van Wijk as members, held five meetings, attended also by
the Executive Board’s chairman. In the course of 2003,
Mr. Tabaksblat stepped down as chairman, in compliance with
the Dutch Corporate Governance Code. Discussions
concentrated on the remuneration of the Executive Board
members and revisions to the Remuneration Policy. The
Committee also discussed the granting of stock appreciation
rights (SARs) to AEGON employees worldwide in March 2003
and advised the Supervisory Board to approve a SAR Program
AEGON GROUP ANNUAL REPORT 2003 11
for 2003 and 2004. Due to the condition in the SAR Program
for the Executive Board that SARs or stock options will only be
granted if AEGON’s net income per share has increased, the
Executive Board members did not receive any SARs (nor stock
options) in 2003. For further details, please refer to the
chapter on AEGON’s Remuneration Report on page 70 and
following and the remuneration of the Executive Board on
pages 1 17 and 1 18.
The Nominating Committee, active since 1983, with
Mr. Tabaksblat as chairman and Messrs. De Ruiter, Olcay and
De Wit as members, held five meetings in 2003. Four meetings
were also attended by the Executive Board’s chairman, one
meeting was being held without any Executive Board member
present. The Committee discussed the functioning and the
composition of the Executive Board and the Supervisory Board
and the existing and forthcoming vacancies in both Boards.
The Strategy Committee, active since 2002, with
Mr. Tabaksblat as chairman and Messrs. De Ruiter, Olcay and
Storm as members, held three meetings, also attended by the
Executive Board members. The purpose of this Committee is
to review the major features of AEGON’s strategy, to look at
alternatives and to consider the material aspects relating to
the implementation of the strategy. The Committee discussed
AEGON’s business strategy at length and prepared the agenda
for the strategy meeting of the Supervisory Board held in
June 2003.
SUPERVISORY BOARD CHANGES IN COMPOSITION
Mrs. Peijs stepped down from the Supervisory Board on
May 20, 2003, following her appointment as the Minister for
Transport, Public Works and Water Management of the
Netherlands. We congratulate her with this appointment
while at the same time regretting the fact that we have lost
a valuable member on our Board.
Mr. Posthumus stepped down from the Supervisory Board
on April 17, 2003, as he reached the retirement age of 70
years. He had been a member since 1997. We thank him for
his valuable contributions to the Board’s discussions.
Mr. Van Wijk was appointed as a member of the
Supervisory Board as from April 17, 2003.
In 2004, Mr. de Ruiter will reach the retirement age of
70 years and will step down at the end of the annual General
Meeting of Shareholders in that year. It is the intention that
this vacancy be filled by nominating Mr. René Dahan, a former
director of Exxon Mobil Corp. He will be nominated for
appointment during the annual General Meeting of
Shareholders to be held on April 22, 2004. Further details of
Mr. Dahan will be provided together with the agenda for the
annual General Meeting of Shareholders on April 22, 2004.
Also in 2004, the four-year terms of office of Mrs. Rembe
and Messrs. Olcay and De Wit will end. Mr. De Wit has been
a member of this Board for fourteen years and will, in
compliance with the Dutch Corporate Governance Code, step
down as a member at the annual General Meeting of
Shareholders to be held on April 22, 2004. Mrs. Rembe and
Mr. Olcay are eligible for reappointment. We intend to nominate
them for reappointment during the annual General Meeting of
Shareholders on April 22, 2004.
The departures of Mrs. Peijs and Mr. De Wit caused two
vacancies in the Board. We will fill these vacancies.
In 2005, the four-year terms of office of Messrs. Eustace,
Stevens and Tabaksblat will end. Messrs. Eustace and Stevens
are eligible for reappointment. In compliance with the Dutch
Corporate Governance Code, Mr. Tabaksblat is not available
for reappointment and he will consequently step down
at the end of the annual General Meeting of Shareholders to
be held in 2005.
EXECUTIVE BOARD CHANGES IN COMPOSITION
Mr. Wynaendts was appointed a member of the Executive
Board as per the close of the annual General Meeting of
Shareholders held on April 17, 2003.
On November 1, 2003, Mr. Van de Geijn stepped down as
a member of the Executive Board. We thank him for over 30
years of good service to the AEGON Group.
ANNUAL ACCOUNTS AND DIVIDEND
This annual report includes the annual accounts for 2003, as
submitted by the Executive Board and advised upon and
proposed by the Audit Committee. We recommend that
shareholders adopt these accounts. A total dividend for 2003
of EUR 0.40 per common share is proposed.
ACKNOWLEDGEMENT
In what has been a year of real progress for AEGON under
difficult circumstances, we would like to express our gratitude
to the Executive Board and all members of the AEGON
community worldwide for their strong commitment and
dedication towards growing AEGON’s business. We thank them
for their unabated energy and professionalism in responding to
difficult and rapidly changing markets.
The Hague, March 1 1, 2004
On behalf of the Supervisory Board,
Morris Tabaksblat, chairman
AEGON GROUP ANNUAL REPORT 2003 12
M. Tabaksblat (1937), chairman and Dutch nationality, is
chairman of Reed Elsevier and a retired chairman and CEO of
Unilever. He was appointed in 1990; his current term will end in
2005. He is also chairman of the Supervisory Board of TPG
and a member of the International Advisory Board of Citigroup
International (USA) and Renault Nissan (France/Japan). He is
currently the chairman of the Nominating Committee and the
Strategy Committee.
H. de Ruiter (1934), vice-chairman and Dutch nationality, is a
retired managing director of Royal Dutch Petroleum Company
and group managing director of Royal Dutch/Shell group of
companies. He was appointed in 1993 and he will retire on
April 22, 2004, having reached the retirement age of 70.
He is a member of the Supervisory Boards of Royal Dutch
Petroleum Company, Heineken N.V., Wolters Kluwer N.V. and
Univar N.V. He is currently a member of the Audit,
Compensation, Nominating and Strategy Committees.
D.G. Eustace (1936), British nationality, is chairman of Smith &
Nephew plc (London, UK) and former vice-chairman of Royal
Philips Electronics. He was appointed in 1997 and his current
term will end in 2005. He is also a member of the Supervisory
Boards of Royal KLM N.V., Royal KPN N.V. and Hagemeyer. He is
currently the chairman of the Audit Committee.
O.J. Olcay (1936), American nationality, is vice-chairman and
managing director of Fischer, Francis, Trees and Watts, Inc.
(New York, USA). He was appointed in 1993 and his current
term will end in 2004. He is eligible for reappointment. He is
chairman of FFTW Funds Inc. in New York (USA), FFTW Funds
Selection in Luxembourg and FFTW Funds in Dublin (Ireland).
He is currently a member of the Nominating Committee and
the Strategy Committee.
T. Rembe (1936), American nationality, is a partner of Pillsbury
Winthrop LLP (San Francisco, USA). She was appointed in
2000 and her current term will end in 2004. She is eligible for
reappointment. She is a member of the Board of Directors of
SBC Communications Inc. (USA). She is currently a member of
the Audit Committee.
W.F.C. Stevens (1938), Dutch nationality, is a retired
partner/senior counsel of Baker & McKenzie and was a senator
in the Dutch Parliament until June 2003. He was appointed in
1997 and his current term will end in 2005. He is the chairman
of the Supervisory Board of NIB Capital N.V. and a member of
the Supervisory Boards of N.V. Luchthaven Schiphol and TBI
Holdings B.V. He is currently a member of the Audit Committee
and the Compensation Committee.
K.J. Storm (1942), Dutch nationality, is a former chairman of
the Executive Board of AEGON N.V. He was appointed in 2002
and his current term will end in 2006. He is the chairman of
the Supervisory Boards of N.V. Royal Wessanen and Laurus N.V.
and a member of the Supervisory Boards of Royal KLM N.V.
and Pon Holdings B.V. He is also a member of the Board of
Directors of Interbrew S.A. (Leuven, Belgium) and Baxter
International Inc. (USA). He is currently a member of the
Strategy Committee.
L.M. van Wijk (1946), Dutch nationality, is the CEO of Royal
KLM N.V. He was appointed in 2003 as a member of the
Supervisory Board and his current term will end in 2007. He is
also a member of the Supervisory Boards of Randstad Holding
N.V. and Martinair and the Netherlands Board of Tourism and a
member of the Board of Directors of Northwest Airlines. He is
currently a member of the Compensation Committee.
F.J. de Wit (1939), Dutch nationality, is a former chairman
of the Executive Board of N.V. Koninklijke KNP BT. He was
appointed in 1990 and his current term will end in 2004.
He has been a member of the Supervisory Board for fourteen
years and will, in compliance with the Dutch Corporate
Governance Code, step down as a Supervisory Board member
on April 22, 2004. He is also the chairman of the Supervisory
Board of PontMeyer N.V. and a member of the Supervisory
Board of Océ N.V. He is currently the chairman of the
Compensation Committee and a member of the Nominating
Committee.
MEMBERS OF THE SUPERVISORY BOARD OF AEGON N.V.
AEGON GROUP ANNUAL REPORT 2003 13
INSIGHTAEGON’S EXECUTIVE BOARD AND COUNTRY HEADS OF AEGON USA, AEGON THE NETHERLANDSAND AEGON UK ADDRESS SOME KEY ISSUES
AEGON GROUP ANNUAL REPORT 2003 14
INSIGHT
Making money in a low interest rate environment
Low interest rates affect our earnings and are a factor for everyone in our
industry. Declining interest rates have an effect on our general account fixed
income investments, which includes the assets supporting traditional life
products. It is important to point out however, that portions of AEGON’s
business are in fact not dependent on interest rates. For example, earnings on
traditional life products, the largest part of our business are, to a certain
extent, derived from mortality experience. In addition, our product offering is
very broad and includes a wide range of products that is less sensitive to
interest rates. We are also well-positioned to meet customer preferences for
equity-related products in this low interest rate environment.
There are, of course, management actions that can be taken to reduce the
effects of lower interest rates. In the United States, we have taken a number of steps to mitigate the
effects of the current low interest environment on our fixed annuity products. Examples include lowering
crediting rates to existing policyholders, adjusting commission structures, re-filing with most states to
lower the interest guarantee on new products, and eliminating commissions on fixed annuities in states
where re-filing was not possible.
Expense management is also important. I believe AEGON is one of the most cost efficient insurance
companies in the world, which is even more beneficial in this climate. The current reorganizations in the
United Kingdom and the Netherlands, as well as cost reduction initiatives in the United States, are all part
of this drive to increase efficiency. We are concentrating our efforts on directing resources to areas that
will provide maximum return.
The potential for growth in AEGON’s mature markets
The key to achieving growth is distribution. For this reason we have continued the development of our
distribution channels through banks in the United States and Spain, as well as brokers in the Netherlands
and independent financial advisors in the United Kingdom. Distribution is, and will continue to be, a
fundamental aspect of AEGON’s strategy.
Another important aspect is scale, which AEGON has achieved. We have leadership positions in each of
our chosen markets and we plan to strengthen our presence in these markets over the coming years.
However, increasing market share does not come through distribution and scale alone. Fulfilling our
customers’ needs in terms of the quality and range of products is essential. Our customers increasingly
have multiple insurance needs and we have to ensure that we are able to meet their demands. The ability
to deliver this is what distinguishes AEGON from the competition.
What do the recent corporate governance developments mean for AEGON’s shareholders?
AEGON’s Articles of Incorporation were amended in May of 2003, following approval by our shareholders.
The change increased the authority of AEGON’s common shareholders and aligned the voting rights of
Vereniging AEGON (Association AEGON) with its economic interest. The amendments replace a structure
that dates back to a time when AEGON was mainly operating in the Netherlands. We are committed
to meeting emerging global best practices in corporate governance and this decision is consistent with
that goal.
As I mentioned in my letter to shareholders, the Dutch Corporate Governance Code is also an important
development that will raise corporate governance standards for Dutch companies. AEGON already complies
with most of the code and we are currently assessing all of its recommendations.
Why is corporate responsibility such an important issue for AEGON?
We recognize that a company’s performance and profitability go hand in hand with good business
practices. Companies should devote proper consideration of their wider responsibilities to the communities
in which they operate. AEGON does so. For any corporate responsibility strategy to succeed, it must start
DON SHEPARD
CHAIRMAN OF THE
EXECUTIVE BOARD
AEGON GROUP ANNUAL REPORT 2003 15
from the top. AEGON’s senior management at both the Executive Board and country unit level are
committed to living in accordance with a corporate responsibility code.
Increasingly, companies are judged not only on the quality of their products, services and financial
performance, but also on many intangible criteria that fall within the category of corporate responsibility.
It is important to us that we continue to meet international expectations and we are proud of our many
contributions to the local communities where we operate. Examples of these activities are included in this
year’s annual report.
The divestiture of Transamerica Finance Corporation
It has been a long-standing strategy of AEGON to focus on core activities, the business we know best – life
insurance, pensions, savings and investment products.
As part of this strategy, we announced in August 2003 the agreement to sell most of Transamerica
Finance Corporation’s (TFC) commercial lending activities to General Electric. This transaction was
successfully completed in January 2004. We also sold Transamerica’s real estate tax services and flood
hazard certification businesses in October 2003. The TFC companies had a successful year and we wish
them well under their new owners.
TFC’s businesses owned by AEGON now consist largely of maritime container and European trailer
leasing. We will continue to seek the divestiture of the remaining TFC businesses in order to align AEGON’s
resources with its focused strategy.
AEGON’s policy towards currency hedging
As it is for any international business with exposure to foreign currencies,
currency translation affects AEGON. The majority of AEGON’s earnings are
generated in non-euro currencies, while the company’s reporting currency
is the euro. Our policy is quite simple - we do not hedge translation risk.
While some form of hedging activity may have tempered the volatility of
earnings in recent years, hedging our translated dollar earnings would have
cost hundreds of millions of euro and would not have been a prudent use of
shareholders’ funds. Rather than hedging against translation, we will continue
our practice of advising investors about the approximate influence of currency
movements on our reported earnings through the sensitivity analysis we
perform and report on each year.
For our balance sheet, liabilities in a particular currency are balanced against assets in that same currency.
At the same time, all capital leverage debt is pro-rated in the local currencies relative to the invested
capital, so changes in currency rates do not affect debt-to-capital ratios.
Discontinuation of the indirect income method
As announced in the 2002 annual report, starting January 1, 2004, we will no longer use the indirect
income method for recognizing gains and losses on our investments in shares and real estate. Since 1995,
we have used this method to reflect the long-term nature of our business, by recognizing gains and losses
on shares and real estate using a thirty-year average return against the seven-year average portfolio
balance. In the international environment that AEGON operates, comparability is critical. For this reason, a
new method will be used, which will be in line with what will be required by IFRS and is similar to US GAAP.
This new method recognizes gains and losses on equity and real estate investments when realized. While
the effect on net income is not determinable, future results are expected to become more volatile.
However, we believe the increase in transparency and comparability is important.
JOS STREPPEL
CFO AND MEMBER OF THE
EXECUTIVE BOARD
Looking at AEGON’s approach to capital leverage
We are committed to a strategy that will ensure the continued financial strength of the AEGON Group.
This is demonstrated by the AA ratings from Standards & Poor’s for our operating companies in our core
markets of the United States, the Netherlands, and the United Kingdom. We manage the capital adequacy
of our operating units according to regulatory requirements, self-imposed standards, and taking into
account local capital adequacy models from Standards & Poor’s. Capital adequacy consistent with an AA
rating on the local Standard & Poor’s models exceed those of the regulatory bodies and other self-imposed
requirements in most of the countries in which we operate. For the AEGON Group, we manage leverage
within certain tolerance levels: targeting shareholders’ equity to exceed a minimum of 70% of total capital,
while limiting dated subordinated and senior debt to 25%. Capital securities are managed within a
minimum of 5% and a maximum 15% of total capital. In 2003, shareholders’ equity and debt were
influenced by currency exchange rates, but the equity to total capital base ratio was not materially
affected as we manage the debt to be in proportion to the local currency of invested capital in our
subsidiaries.
Current status on IFRS implementation
In June 2002, the European Union (EU) endorsed proposals that all exchange-listed companies in the EU
should report under International Financial Reporting Standards (IFRS) by 2005. This is a further step
forward in increasing transparency and harmonization in financial reporting, which AEGON fully supports.
The overall objective of AEGON’s conversion from Dutch accounting principles to IFRS is to enable AEGON
to prepare a full set of consolidated IFRS financial statements for the 2005 financial year. Conversion
teams in each of the business units have project plans in place to ensure that AEGON meets this deadline.
This conversion process is controlled and monitored centrally and takes into account the effect of on-going
developments in accounting for financial instruments and insurance liabilities.
The opportunity seems obvious and can be summed up in one word: comparability. As we approach
IFRS, our main interest is to ensure a level playing field, allowing fair comparison of all companies
competing for capital. For the life insurance industry in particular, it is our interest to have a system, which
takes into account the long-term nature of life insurance and pension products.
AEGON’s approach to risk management
Over the past several years, AEGON has been strengthening its global risk management framework. Capital
management has been a central function within AEGON for many years. AEGON has been and will continue
to closely align its capital management with the risk management performed by the country units. These
efforts continued in 2003, and now allow for a more proactive and coordinated approach to risk and
capital management within AEGON, which is demonstrated by the activities of the Group Risk and Capital
Committee. Among other things, the committee monitors the risks of the AEGON Group, makes
recommendations and oversees remedial action where exposures are deemed excessive.
The move to reporting embedded value
In August 2003, we reported our embedded value for the first time, which also included a comprehensive
sensitivity analysis and valuation of our product guarantees, which provided more detail than most of the
disclosure that was already in the market. The response from the investment community has been very
encouraging. With international financial reporting standards and regulations constantly evolving to higher
levels, the move to reporting embedded value is part of our overall commitment to providing high quality
disclosure and to increase the transparency of AEGON. AEGON will report on its 2003 embedded value
on June 7, 2004.
AEGON GROUP ANNUAL REPORT 2003 16
INSIGHT
AEGON GROUP ANNUAL REPORT 2003 17
Strategy for achieving top-line growth
Multi-channel distribution is the catalyst that drives revenue growth. In the
United States, as part of our strategy, we use a multi-channel distribution
network to generate profitable growth within an acceptable risk profile.
Strengthening and expanding AEGON’s relationships with these distributors is
key to this strategy. We look to help our partners grow their businesses
through our broad product range and quality service to customers. We also
support our revenue drivers through an organizational structure that
separates product distribution and manufacturing. This lets sales
professionals focus on what they do best – recruiting new distributor
relationships, broadening existing relationships and generating sales.
At the same time, our manufacturing centers have maintained high levels
of service and reduced operating expenses. Multi-branding is another component of our strategy. In many
instances, we offer comparable products to varying distribution channels, using different brand names.
With this strategy, we can penetrate certain markets and geographical regions better than we could with a
single brand.
AEGON Direct Marketing Services – looking at the business and opportunity for growth
AEGON Direct Marketing Services (ADMS) is an important part of AEGON’s business – both in the United
States and internationally. With more than 20 million customers, ADMS is one of the largest providers
of life insurance, supplemental health and fee-based products through sponsored relationships and other
direct-to-consumer initiatives. Most of the customers reached through ADMS are not served by any of our
other distribution channels. Our goal is to develop lifetime customers by actively managing customer
relationships and working internally to build cross-marketing opportunities.
Less than five years ago, ADMS began exporting its proven business model to a growing overseas
market. Using direct mail and telemarketing, ADMS leverages its overseas business partners’ brands when
selling to its customers. Telemarketing and other business services are typically outsourced locally to
maintain a low cost of entry into a new market. ADMS now operates in seven countries in Europe and Asia.
Along with international expansion, ADMS is also responding proactively to regulatory barriers in the
United States by opening new market segments in the United States, cross-selling additional products
utilizing customer service centers, and expanding their product mix. We believe there will be opportunities
to gain market share from competitors who lack the scale and resources to compete successfully in a more
regulated US environment.
The importance of bank distribution to AEGON USA
The bank distribution channel is very important to AEGON USA. Our investment here goes back 20 years,
where we have been one of the leading fixed annuity providers utilizing relationships with 15 of the largest
banks and the majority of the top 50 financial institutions. In 2003, life sales through banks more than
doubled. Working closely with our partners, AEGON USA can customize products and support to help banks
expand their relationship with their customers.
Today, as banks expand their non-traditional product lines, many prefer to work with a company that
can offer a complete range of insurance and investment products. We are one of the few organizations
with the experience, wholesaling strength and product depth to accomplish this. Each one of our business
units can add value to the banking relationship by providing their own unique financial product solutions.
As a single-source solution, we offer banks the benefits of local relationship management, backed by the
full resources of the AEGON organization.
Agency-sold life sales momentum
Transamerica Insurance & Investment Group’s (TIIG) agency force has been a key contributor to the sales
momentum of our agency-sold life business. With more than 100,000 independent agents, TIIG is an
established, respected and geographically dispersed marketing organization. Our product depth and
PAT BAIRD
PRESIDENT AND
CEO AEGON AMERICAS
AEGON GROUP ANNUAL REPORT 2003 18
INSIGHT
commitment to service have been instrumental in the growth of the business. Over the past few years, we
have doubled the number of producers in our independent producer channel.
Pension Group deposits continue their growth, driven primarily by sales in the mid-to-large plan market.
The Pension Group has gained considerable advantage by investing in its technological infrastructure to
meet the growing complexity of the business and increased sponsor demands. As a result, plan processing
and administrative functions are handled more efficiently, while participants benefit from improved
capabilities to assess their account information and retirement planning via the web.
Sales have also been encouraging in the fast-growing small-plan market where products are distributed
through independent producers and professional organizations as well as leading banks and brokerage
firms. The Pension Group has been successful in company-wide cross-marketing initiatives.
Restructuring AEGON The Netherlands
In an environment of increasing competition, regulation and cost of
distribution, there has become a stronger need for greater quality and
efficiency throughout our business in the Netherlands. Going forward, it is
vital that we structure ourselves in a way that enables the business to grow
profitably and to fulfill the ever changing and increasing needs of our
customers, in all the markets in which we operate. Subsequently, a number of
necessary steps have been taken to restructure the business. The new AEGON
The Netherlands will be a business that can deal with dynamics and
developments in the market more efficiently than under the previous
structure. The thirteen business units, which had been operating as
independent businesses from various sites throughout the country, are making
way for five service centers and four marketing and sales organizations, at
only three locations. This new structure not only provides for benefits of scale and a higher level of quality
due to centralization and standardization of processes in the production environment, it also gives focus to
the marketing and sales organizations and allows them to develop products tailored to customer needs
more efficiently. The new structure helps to build close and strong relationships with the distributors,
enabling us to better and more quickly understand the changing needs of our current and potential
customers. AEGON The Netherlands is on the move, towards an organization where the customer, again, is
the motive power of our business.
While the restructuring will result in staff reductions, it is important to emphasize that this will be
achieved through attrition rather than through compulsory redundancies.
Product strategy for the Netherlands life market
AEGON is the second largest life insurer in the Netherlands, with a strong position in individual, group life
and pension businesses. Our product offering also includes accident and health, general insurance and
savings accounts. AEGON The Netherlands targets many customer segments through a sophisticated multi-
channel distribution network. We recognize that in today’s world, customers – whether individual,
corporate or institutional – demand high quality tailor-made products delivered with excellent service.
The steady gain in market share in the group pension business, the largest part of our activities in
the Netherlands, demonstrates this.
We have improved the transparency of our products and services, anticipating forthcoming legal and
regulatory changes in the financial services industry in the Netherlands. That is what customers expect
from AEGON.
Looking forward, there are significant long-term growth opportunities in our existing core markets.
For example, in the group pension market where we offer products and services in asset management,
liability risk management and pension administration, bundled or unbundled, and also in the individual
pension and income markets.
JOHAN VAN DER WERF
MEMBER OF THE
EXECUTIVE BOARD AND
CEO AEGON THE NETHERLANDS
AEGON GROUP ANNUAL REPORT 2003 19
Strategy for achieving top-line growth
In a challenging market for life insurance and pension products, AEGON The Netherlands is confident of its
ability to grow its business in the long term, and expects to gain market share in some areas. High quality
value-added products and services, supported by a low level of operating costs provide us with a healthy
competitive position. While our existing customers already form a good basis from which to grow, we are
extending our customer reach by adding distribution and database capabilities and building stronger
relationships with intermediaries. As we have done in the past, we continue to focus on market or product
segments we believe will provide opportunities for profitable growth in the future.
AEGON UK’s strategy for long-term growth
When AEGON acquired Scottish Equitable in 1994, we came in believing that
the United Kingdom offered substantial long-term growth potential. Today, our
opinion has not changed and AEGON UK is wholly committed to the
development of its business. The United Kingdom is one of the largest savings
markets in which AEGON operates. However, recent regulatory changes,
including price capping of certain products, coupled with the presence of a high
exposure to equities in many product areas, has presented significant challenges
to the life industry. Our strategy is to create a core of quality financial products
and services and to strengthen further our position as one of the leading
companies in the industry. A key aspect of our strategy is to expand our
product range, while building strong relationships with our distribution partners.
Internal reorganization of AEGON UK
In October 2003, we announced a new structure for AEGON UK, which is an important development in the
continued enhancement of our services and of the lowering of our cost levels. The new structure included
the creation of AEGON UK Life and Pensions, and this new unit has brought together Scottish Equitable,
Scottish Equitable International, AEGON Individual Protection and AEGON UK Services into one organization.
AEGON UK has made significant investments in the development of new technology platforms. This has
made our processing more cost effective and reduced significantly our ‘time to market’ for product and
service enhancements. In addition, it has allowed us to step up our delivery in the important area of
e-commerce, particularly in the corporate pensions market. For example, corporate customers are now able
to benefit from SmartScheme, an online solution, which makes managing a group pension scheme less
time consuming and more cost effective for employers than ever before.
Asset management in AEGON UK
With over GBP 30 billion of assets under management, our in-house investment manager, AEGON
Asset Management UK, is one of the UK’s leading providers of institutional and retail fund services.
We have developed a market-leading ‘open architecture’ approach for our life and pension products,
which include access at a competitive cost to ten carefully selected external fund managers, our
investment partners. Market developments mean we are more committed than ever to advancing the
development of this approach.
Providing a genuine choice of internal and external asset management capabilities means that we can
offer investment solutions tailored to suit anyone from the most cautious investor to the most ambitious.
AEGON’s expansion into the IFA market
Independent financial advisors (IFAs) have long been the primary channel through which we have provided
our pension and life products. We remain committed to the advice-based sales channel and we are
confident that depolarization will reaffirm the position of that channel. One of our key aims is to establish
DAVID HENDERSON
GROUP CHIEF EXECUTIVE
AEGON UK
AEGON GROUP ANNUAL REPORT 2003 20
INSIGHT
strong partnerships with IFAs, ensuring that both parties’ ability to deliver value-adding financial planning
solutions is continually developed. The regulatory changes have provided an opportunity to build our own
distribution capability in a highly fragmented market. AEGON UK has invested in the ownership of
distributors and as a result of these transactions we are now one of the largest distribution organizations
in the United Kingdom. Further consolidation in the market will continue and we believe that AEGON UK
Distribution is well placed to benefit from such developments.
Business development: leveraging existing knowledge and skills
AEGON's strategy is to focus on profitable growth. We are confident that there
are many ways in which AEGON can successfully leverage its broad knowledge
and skills in markets where we already have major operations, such as in the
United States and in Europe, and also in developing and emerging countries in
Asia as well as in Central and Eastern Europe.
AEGON opened operations in Taiwan in 1994 as a start-up and it has
formed the blueprint for AEGON's approach to start-ups. It started from a
small base but AEGON Taiwan is now experiencing significant growth. Under
the direction of an experienced local management team, the successful
execution of a multi-channel distribution strategy has been the key driver of
our growth in Taiwan. This includes traditional agents, bancassurance and
brokers through which we have gained a significant market share. Bancassurance, which currently
contributes about 50% of production, is a relatively new and fast-moving distribution channel in Taiwan.
We have been able to establish partnerships with sixteen banks operating in the country.
AEGON entered the Hungarian market in 1992 and we now have a top two position with a significant
share of the country's life market. Hungary is a key market in Central Europe and provides AEGON with a
strong platform for expanding into other selected countries in the region, acting as a regional support for
new greenfield operations. In September 2003, we established a greenfield in Slovakia and initial sales
results are encouraging. With a number of Central and Eastern European countries set to join the European
Union in May 2004, we expect to see further favorable developments.
In April 2003 we started life operations in the fast-growing life insurance market of mainland China
through the joint venture with the Chinese National Offshore Oil Corporation (CNOOC). Our strategy is to
leverage the group’s skills by developing a multi-channel distribution capability to achieve accelerated
growth.
Also, our expertise and high professional standards in pensions, especially group pensions, make us well
positioned to benefit from developments in the pension market in Europe. Most of the larger continental
European countries still have a pay-as-you-go pension system, which is becoming an increasingly
unsustainable burden on the finances of these countries. The governments of these countries are
recognizing the magnitude of the emerging pension burden and are demonstrating the courage to
implement fundamental reforms, which will lead to a much larger participation of the private sector in
developing pension activities. We remain committed to taking advantage of the opportunities that these
major European markets represent.
Expansion of our distribution partnerships: the example of Spain
We see attractive opportunities in developing new distribution channels in existing markets. A good example
of this is the joint venture with Caja de Ahorros del Mediterráneo (CAM), as announced in November 2003.
The partnership with CAM creates a joint venture, which we expect to become one of the key players in
the Spanish life insurance and pensions market. It provides AEGON with exclusive use of CAM's banking
network of over 850 branches to sell life insurance and is a major step in strengthening our distribution in
Spain. The Spanish life insurance market is the fifth largest market in Europe. Banks have proven to be the
preferred intermediary by Spanish customers and have been a major contributor to the recent growth of
the market. The partnership with CAM will prove to be a considerable driver for the profitable growth in
Spain and complements our existing Spanish franchise.
ALEX WYNAENDTS
MEMBER OF THE
EXECUTIVE BOARD
AEGON GROUP ANNUAL REPORT 2003 21
REVIEW OFOPERATIONSA COMPREHENSIVE ACCOUNT OF AEGON’SPERFORMANCE DURING 2003
AEGON GROUP ANNUAL REPORT 2003 22
REVIEW OF OPERATIONS
RESULTS OF OPERATIONS 2003 2002in million in million
EUR EUR %
INCOME BY PRODUCT SEGMENT
Traditional life 1,218 1,457 (16)
Fixed annuities 334 174 92
GICs and funding agreements 213 272 (22)
Life for account of policyholders 378 371 2
Variable annuities 63 (462)
Fee business 6 2
LIFE INSURANCE 2,212 1,814 2222
Accident and health insurance 283 278 2
General insurance 61 62 (2)
TOTAL INSURANCE ACTIVITIES 2,556 2,154 19
Banking activities 20 8 150
Interest charges and other (429) (313) 37
Income before tax 2,147 1,849 16
Corporation tax (572) (353) 62
Transamerica Finance Corporation 218 51
NET INCOME 1,793 1,547 16
INCOME GEOGRAPHICALLY
Americas 1,538 1,206 28
The Netherlands 771 659 17
United Kingdom 188 233 (19)
Other Countries 79 64 23
Income before tax business units 2,576 2,162 19
Interest charges and other (429) (313) 37
Income before tax 2,147 1,849 16
Corporation tax (572) (353) 62
Transamerica Finance Corporation 218 51
NET INCOME 1,793 1,547 16
The United OtherAmericas Netherlands Kingdom Countries Totalin million in million in million in million in million
EUR EUR EUR EUR EUR
2003
Total life insurance gross premiums 6,157 3,247 5,974 831 16,209
Accident and health insurance premiums 2,217 163 — 83 2,463
General insurance premiums — 459 — 337 796
Total gross premiums 8,374 3,869 5,974 1,251 19,468
Investment income insurance activities 5,618 1,465 137 132 7,352
Fees and commissions 854 265 90 12 1,221
Income from banking activities — 354 — — 354
Total revenues business units 14,846 5,953 6,201 1,395 28,395
Income from other activities — — — — 34
Total revenues — — — — 28,429
Number of employees, including agent-employees 14,308 6,034 4,864 2,502 27,708
AEGON GROUP ANNUAL REPORT 2003 23
RESULTS
Full year net income of EUR 1,793 million increased 16%compared to EUR 1,547 million in 2002. The largestinfluences on full year results were improved equity andcredit markets as well as improved administrativeoperating efficiencies.
Exchange rate translation negatively impacted the earnings reported in euro, which is the currency of thefinancial statements. At constant currency exchange rates net income and income before tax increased by 30% and 29%respectively in 2003.
Earnings per share for the full year amounted to EUR 1.15,an increase of 1 1% compared to EUR 1.04 for last year(adjusted for the 2002 stock dividend).
Standardized life production increased by 3% to EUR 2,545million, which at constant currency exchange rates would haveincreased by 15%. The increase in standardized life productionwas driven by higher production in the Americas, the UnitedKingdom and Other Countries, in particular in Taiwan, partlyoffset by lower production in the Netherlands.
During 2003, indirect income of EUR 631 million pre-taxwas included in earnings, compared to EUR 758 million pre-taxin 2002. As announced earlier, effective January 1, 2004,AEGON discontinued the indirect income method forrecognizing gains and losses on investments in shares and realestate. A generally accepted and recognized method has beenadopted, which is in accordance with International FinancialReporting Standards (IFRS) requirements and is similar to USGAAP. This method recognizes gains and losses on shares andreal estate investments when realized.
Transamerica Finance Corporation (TFC), most of whichwas sold in line with our strategy to concentrate on lifeinsurance, pensions, savings and investment products,contributed EUR 218 million to net income during 2003compared to EUR 51 million in 2002.
The effective tax rate for 2003 was 27% compared to 19%in 2002. The lower effective tax rate in 2002 was largely dueto a reduction of the deferred tax liability and favorableadjustments resulting from the filing of the 2001 corporate taxreturns in the United States, lower taxable income relative topreferred investments and tax-exempt income in theNetherlands and the United States, and the use of tax losses inthe United Kingdom.
The following selected financial data should be read inconjunction with AEGON’s consolidated financial statementsand the related notes to the financial statements of this annualreport. The discussion of AEGON’s full year results for 2003includes comparative information presented in USD for theresults in the Americas and in GBP for the results in the UnitedKingdom, which management believes is useful to investorsbecause those businesses operate and are managed primarilyin those currencies.
AMERICAS (INCLUDES AEGON USA AND AEGON CANADA)
INCOME BY 2003 2002 2003 2002
PRODUCT SEGMENT in in in inmillion million million million
USD USD % EUR EUR %
Traditional life 724 813 (11) 640 859 (25)
Fixed annuities 378 165 129 334 174 92
GICs and funding agreements 241 257 (6) 213 272 (22)
Life for account ofpolicyholders 82 106 (23) 73 112 (35)
Variable annuities 71 (437) 63 (462) —
Fee business (19) 5 (17) 5 —
LIFE INSURANCE 1,477 909 62 1,306 960 36
Accident and health insurance 263 233 13 232 246 (6)
INCOME BEFORE TAX 1,740 1,142 52 1,538 1,206 28
Corporation tax (501) (226) 122 (443) (239) 85
NET INCOME 1,239 916 35 1,095 967 13
INCOME BEFORE TAX
Income before tax of USD 1,740 million increased USD 598million or 52%, compared to 2002, primarily due to loweradditions to the asset default provision (USD 258 million),lower accelerated amortization of deferred policy acquisitioncosts (DPAC) for variable annuities (USD 314 million) and loweradditions to the provisions for guaranteed minimum benefits(GMBs) (USD 243 million). Income before tax also reflects thefollowing one-time positive items: a non-recurring propertyinsurance settlement benefit of USD 54 million, a provisionrelease of USD 36 million relating to real estate and intereston a tax refund for an amount of USD 34 million. Partiallyoffsetting the income increases were lower employee pensionplan income (USD 90 million), lower indirect investmentincome from shares and real estate investments (USD 135million) and lower investment yields (USD 91 million) on thegeneral account fixed income investments.
Traditional life income before tax of USD 724 million in 2003
was 1 1% lower than in 2002, reflecting lower investment yields
on fixed income investments, less indirect investment income
and a reduction in employee pension plan income. The one-
time property insurance settlement benefit and a provision
release described above partially offset these negative results.
Fixed annuity income before tax of USD 378 million
increased 129% compared to 2002. The favorable impact of
lower credit losses in 2003 was partly offset by the decline in
indirect investment income and lower product spreads
compared to 2002. Crediting rates were lowered on both
existing and new deposits throughout 2003 to improve
AEGON The Netherlands(in EUR) 4,172 3,654 2,605 2,865
AEGON UK (in GBP) 1,499 1,771 2,028 2,173
Other Countries (in EUR) 409 374 399 481
The exchange rates for US dollar and UK pound per euro for
each of the last five year-ends are set forth in the table below.
Table 2
Closing rates 1999 2000 2001 2002 2003
USD 1.00 0.93 0.88 1.05 1.26
GBP 0.62 0.62 0.61 0.65 0.70
AEGON GROUP ANNUAL REPORT 2003 35
The sensitivity analysis in table 3 shows the effect on net
income and shareholders’ equity of movements in the
exchange rates of AEGON’s most important currencies
relative to the euro.
INTEREST RATE RISK
AEGON bears interest rate risk in many of its products. In
cases where cash flows are highly predictable, investing in
assets that closely match the liabilities can mitigate this risk
– a method that AEGON employs. However, in some products,
liability cash flows are less predictable. The uncertainty arises
from policyholder actions that can be affected by the level of
interest rates.
In periods of rapidly increasing interest rates, policy loans,
surrenders and withdrawals may increase and usually do.
Premiums in flexible premium policies may decrease as
policyholders seek investments with higher perceived returns.
This activity may result in cash payments requiring the selling
of invested assets at a time when the prices of those assets
are adversely affected by the increase in market interest rates,
which may result in realized investment losses. These cash
payments to policyholders result in a decrease in total
invested assets and a decrease in net income. Among other
things, early withdrawals may also cause AEGON to accelerate
amortization of policy acquisition costs, reducing net income.
During periods of sustained low interest rates, life
insurance and annuity products may be relatively more
attractive to consumers, resulting in increased premium
payments on products with flexible premium features and a
higher percentage of insurance policies remaining in force
from year to year. During such a period, investment earnings
may be lower because the interest earnings on new fixed
income investments will likely have declined with the market
interest rates. In addition, mortgages and redeemable bonds in
the investment portfolio are more likely to be repaid as
borrowers seek to borrow at lower interest rates and AEGON
may be required to reinvest the proceeds in securities bearing
lower interest rates. Also, in a period of low interest rates,
AEGON may not be able to credit rates on policies at the low
levels that would preserve margins as a result of minimum
guaranteed crediting rates provided on policies. Accordingly,
during periods of sustained low interest rates, net income may
decline as a result of a decrease in the spread between either
the interest rates credited to policyholders or the rates
assumed in reserves and returns on the investment portfolio.
The general account fixed income portfolios of AEGON USA
and AEGON The Netherlands accounted for 96% of the total
general account fixed income portfolio of the AEGON Group
at December 31, 2003. AEGON USA and AEGON
The Netherlands manage their duration mismatch on the basis
of their expectations for the future level of interest rates.
Presently, the other country units target the duration of their
assets to equal approximately the duration of their liabilities.
In addition to point in time duration measurement,
deterministic and stochastic scenarios are used to measure
and manage interest rate risk. In these models, policyholder
behavior changes are anticipated. These models are used by
all country units and aggregated at group level.
For AEGON USA’s businesses, the average duration of
assets is approximately 4.5 years. This relatively low duration,
as compared to the long-term nature of most AEGON USA’s
businesses, is driven by the asset and liability management
process applied to the institutional markets business in the
United States (guaranteed investment contracts and funding
agreements). Both the assets and the liabilities for this
business are managed on a floating rate basis, with extensive
use of interest rate swaps. As a result, these assets and
liabilities, which represent a little over a quarter of the total
general account assets and liabilities of AEGON USA, have an
effective duration of close to three months. The maximum
allowed duration mismatch between the assets and liabilities of
AEGON USA and AEGON The Netherlands is plus or minus one
year. For AEGON The Netherlands, the average duration of
assets is approximately 4.7 years. The combined market value
weighted duration mismatch of AEGON USA and AEGON
The Netherlands was around minus 1.0 years at December 31,
2003. Table 4 on the next page shows each of the last five
year-end interest rates for the period from 1999 through 2003.
Table 3
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO CURRENCY EXCHANGE RATE MARKETS 1,2
Effects on
Movement of markets Effects on net income shareholders’ equity
Increase versus the euro increase between increase betweenof USD, GBP and other currencies of 15% 12.5% and 13.5% 15% and 16%Decrease versus the euro decrease between decrease betweenof USD, GBP and other currencies of 15% 12.5% and 13.5% 15% and 16%
1 Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken. All percentage changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
2 The effect of currency exchange rate movements is reflected as a one-time shift up or down in the value of the US dollar, the UK pound and other currencies on January 1, 2004.
AEGON GROUP ANNUAL REPORT 2003 36
RISK MANAGEMENT AND RISK FACTORS
Table 41999 2000 2001 2002 2003
3 month US Libor 6.00% 6.40% 1.88% 1.38% 1.15%
3 month Euribor 3.34% 4.86% 3.29% 2.87% 2.12%
10-year US Treasury 6.43% 5.10% 5.04% 3.82% 4.25%
10-year Dutch government 5.47% 4.99% 5.11% 4.23% 4.29%
The sensitivity analysis in table 5 shows an estimate of the
effect on net income of movements in the interest rates.
The main driver for the asymmetric effects of an
immediate change of interest rates up or down by 1% or 2% is
the interest rate risk of AEGON USA. It is estimated that an
immediate increase of 1% or 2% will have a negative effect on
earnings mainly as a result of a sudden rise in lapse rates on
fixed annuities. A sudden decrease of 1% or 2% will cause an
overall positive effect as a result of lower lapse rates but is
partially offset by a compression of spreads. It is estimated
that a gradual increase of interest rates would have a
substantially more benign effect on earnings.
The sensitivities have a similar impact on shareholders’
equity. Accordingly, during periods of sustained low interest
rates, net income may decline as a result of a decrease in the
spread between either the interest rates credited to
policyholders or the rates assumed in reserves and returns on
the investment portfolios.
CREDIT RISK
As premiums and deposits are received, these funds are
invested to pay for future policyholder obligations. For most
products (typically general account products), AEGON bears
the risk for investment performance – return of principal and
interest. AEGON is exposed to credit risk on its general
account fixed income portfolio (bonds, mortgages and private
placements), over-the-counter derivatives and reinsurance
contracts. Some issuers have defaulted on their financial
obligations for various reasons, including bankruptcy, lack of
liquidity, downturns in the economy, downturns in real estate
values, operational failure and fraud. In the past, poor
economic and investment climates in AEGON’s major markets
resulted in significant investment impairments on AEGON’s
investment assets due to defaults and overall declines in the
securities markets. Although credit default rates declined in
2003, excessive defaults, or other reductions in the value of
these securities and loans, could have a material adverse
effect on AEGON’s business, results of operations and financial
condition.
The company actively manages its credit risk exposure by
individual counterparty, sector and asset class. AEGON also
employs deterministic and stochastic credit risk modeling in
order to assess AEGON’s credit risk profile and associated
earnings and capital implications due to various credit loss
scenarios.
The general account fixed income portfolios of AEGON’s
major country units are presented in table 6 by rating category.
The fixed income portfolio of AEGON The Netherlands is
of high average credit quality. More than 80% of the portfolio
is invested in treasuries and AAA/AA-rated securities while of
the remainder (excluding mortgages) around 6% is BBB-rated
and less than 1% is below investment grade or not rated. With
Table 5
SENSITIVITY ANALYSIS OF NET INCOME TO INTEREST RATES 1,2
Parallel movement of yield curve Approximate effects on net income
Shift up 100 basis points EUR (35) millionShift up 200 basis points EUR (125) millionShift down 100 basis points EUR 45 millionShift down 200 basis points EUR 35 millionShift down 100 basis points of long-term fixed income DPAC assumptions EUR (25) million
1 Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken; changes are relativeto net income. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
2 The effect of interest rate movements is reflected as the effect of a one-time parallel shift up or down of all relevant yield curves on January 1, 2004.
Table 6
GENERAL ACCOUNT FIXED INCOME(in millions) AEGON AEGON AEGON OTHER
AMERICAS THE NETHERLANDS UK COUNTRIES TOTALRating category (in USD) (in EUR) (in GBP) (in EUR) (in EUR)
Treasuries/agencies 6,387 5,067 224 1,080 11,522
High quality (AAA) 16,128 566 209 104 13,737
High quality (AA) 7,837 319 183 247 7,031
Investment grade (A) 30,061 867 596 357 25,871
Investment grade (BBB) 29,106 472 103 7 23,670
High yield (BB and lower) 7,421 62 0 2 5,940
Mortgages 14,036 4,675 0 7 15,795
Other 2,420 302 1 42 2,261
Total investments fixed income 113,396 12,330 1,316 1,846 105,827
AEGON GROUP ANNUAL REPORT 2003 37
respect to the portion of AEGON The Netherlands’ fixed
income portfolio composed of residential mortgages, the
actual default experience is low, at an annual rate of
approximately 0.02%.
Country units apply specific guidelines for the acceptable
level of credit risk and provide for default losses. AEGON
monitors its aggregate exposure to credit counterparties at
group level. For this purpose, AEGON aggregates exposures
from its country units to assess overall credit risk. To manage
its credit risk, AEGON has a single credit counterparty limit
policy that is applied to all forms of credit risk. Each form of
credit exposure will be factored depending on the form of
credit risk in order to arrive at a risk-weighted credit exposure.
These risk-weighted credit exposures must be within
AEGON’s risk-weighted credit exposure limits, which are shown
are used in combination with high quality low risk assets to
synthetically replicate corporate credit exposures in
constructing investment portfolios. Credit default swaps are
also sold on a limited basis to generate fee income.
Derivative use is managed by requiring a written hedge or
derivative program policy. All traded derivatives must be under
one of these policies. The financial implications of derivatives
are modeled along with all other financial instruments –
whether interest rate, credit or equity risk modeling.
Table 10
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO EQUITY AND REAL ESTATE MARKETS1,2
Approximate effects on
Movement of markets Approximate effects on net income shareholders’ equity
Increase of equity and real estate markets of 10% EUR 70 million EUR 455 millionDecrease of equity and real estate markets of 10% EUR (55) million EUR (470) millionDecrease of equity and real estate markets of 20% EUR (270) million EUR (965) millionShift down 100 basis points of long-term equity DPAC assumptions EUR (65) million
1 Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken. All changes arerelative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases. The approximate effects on shareholders’ equity excludes the effects on net income, which is presented above separately.
2 The effect of movements in equity and real estate markets is reflected as a one-time increase or decrease of worldwide equity and real estate markets on January 1, 2004.
AEGON GROUP ANNUAL REPORT 2003 39
LIQUIDITY RISK
Liquidity risk is inherent in much of AEGON’s business. Each
asset purchased and liability sold has liquidity characteristics
that are unique. Some liabilities are surrenderable, while some
assets have low liquidity such as privately placed loans,
mortgages loans, real estate, and limited partnership interests.
If AEGON requires significant amounts of cash on short notice
in excess of normal cash requirements, AEGON may have
difficulty selling these investments at attractive prices, in a
timely manner, or both.
AEGON closely monitors and manages its liquidity position.
AEGON employs a ‘source and use’ liquidity modeling
technique that measures the degree of excess liquidity at
various time frames over worsening catastrophic scenarios.
Liability liquidity or cash needs are estimated over these
catastrophic or ‘run on the bank’ scenarios throughout AEGON.
Cash generation is then estimated over these same
scenarios with the stipulation that a close to fair price is
received on asset sales (that is, AEGON can not flood the
market). The objective is for AEGON’s cash sources to exceed
cash needs over all scenarios and time frames. Asset portfolios
are constructed so that each country unit is self-supporting
from a liquidity perspective. Future premiums, surplus assets,
back-up liquidity lines and other contingent cash sources and
management action are not utilized in the liquidity testing.
This analysis is completed at each business unit, country unit
and group level.
UNDERWRITING RISK
AEGON’s earnings depend significantly upon the extent to
which actual claims experience is consistent with the
assumptions AEGON uses in setting the prices for products
and establishing the technical provisions and liabilities for
claims. To the extent that actual claims experience is less
favorable than the underlying assumptions used in establishing
such liabilities, net income would be reduced. Furthermore, if
these higher claims were part of a trend, AEGON may be
required to increase liabilities and this would further reduce
net income. In addition, certain acquisition costs related to the
sale of new policies and the purchase of policies already in
force have been recorded on the balance sheet and are being
amortized into income over time. If the assumptions relating to
the future profitability of these policies (such as future claims,
investment income and expenses) are not realized, the
amortization of these costs could be accelerated and may even
require write-offs due to unrecoverability. This could have a
material adverse effect on AEGON’s business, results of
operations and financial condition.
Underwriting risk is first managed through the product
pricing process where margins for adverse deviation and profit
on expected claims are priced in. AEGON monitors claim trends
and its own experience relative to expectations through
experience studies. In addition, claims risk is diversified and
managed through exclusions, exposure limits, such as through
retention and cover limits through reinsurance.
Of AEGON’s business containing mortality risk, AEGON has a
significantly greater proportion of business in those products
paying death benefits (life insurance) versus those making
payment contingent on survivorship (life annuities). Therefore
worsening mortality trends are a greater risk for AEGON
compared to mortality improvement trends.
OTHER RISKS
RATINGS
Claims paying ability and financial strength ratings are factors
in establishing the competitive position of insurers. A rating
downgrade (or the potential for such a downgrade) could,
among other things, materially increase the number of policy
surrenders and withdrawals by policyholders, adversely
affecting relationships with broker-dealers, banks, agents,
wholesalers and other distributors of AEGON’s products and
services. In addition, a downgrade may negatively impact new
sales and adversely affect AEGON’s ability to compete and
thereby have a material adverse effect on AEGON’s business,
results of operations and financial condition.
The current financial strength ratings for AEGON USA’s
insurance companies are AA (very strong) with Standard &
Poor’s and Aa3 (excellent) with Moody’s. Both agencies have a
stable outlook on the ratings of AEGON USA companies.
Negative changes in credit ratings may increase AEGON’s cost
of funding. On April 8, 2003, Standard and Poor’s lowered its
counterparty credit rating on AEGON’s senior debt from AA– to
A+, with a stable outlook. During 2003, Moody’s maintained its
rating on AEGON’s senior unsecured debt at A2 with a
negative outlook.
GOVERNMENT REGULATION
AEGON’s insurance business is subject to comprehensive
regulation and supervision in all countries in which AEGON
operates. The primary purpose of such regulation is to protect
policyholders, not holders of AEGON’s securities. Changes in
existing insurance laws and regulations may affect the way in
which AEGON conducts its business and the products AEGON
may offer. For example, AEGON expects sales in the United
States to be affected by the new amendments to the Federal
Trade Commission Telemarketing Sales Rule, as approximately
17% of AEGON USA new health insurance sales in 2002 were
generated by telemarketing in the United States. The
amendments to the rule, the majority of which went into effect
on March 31, 2003, prevent telemarketers from targeting
potential customers who have elected to be included in a
national ’do not call’ list. Moreover, some states also have
statewide ’do not call’ lists. In addition, changes in pension and
employee benefit regulation, social security regulation,
financial services regulation, taxation and the regulation of
securities products and transactions, may also adversely affect
AEGON’s ability to sell new policies or its claims exposure on
existing policies. Additionally, the insurance laws or regulations
adopted or amended from time to time may be more restrictive
or may result in higher costs than current requirements.
AEGON GROUP ANNUAL REPORT 2003 40
AEGON’s ability to make payments on debt obligations and
pay certain operating expenses may depend upon the receipt
of dividends from subsidiaries. Certain of these subsidiaries
have regulatory restrictions, which can limit the payment
of dividends.
Insurance products enjoy certain tax advantages,
particularly in the United States and the Netherlands, which
permit the tax-deferred accumulation of earnings on the
premiums paid by the holders of annuities and life insurance
products under certain conditions and within limits. Taxes, if
any, are payable on accumulated tax-deferred earnings when
earnings are actually paid. The United States Congress has,
from time to time, considered possible legislation that would
eliminate the deferral of taxation on the accretion of value
within certain annuities and life insurance products. In
addition, the US Congress passed legislation in 2001 that
provided for reductions in the estate tax and the possibility of
permanent repeal of the estate tax continues to be discussed,
which could have an impact on insurance products and sales in
the United States. Recent changes in tax laws in the
Netherlands have reduced the attractiveness of certain of
AEGON’s individual life products. The current administration in
the Netherlands has indicated that it is contemplating further
changes in law that would eliminate the tax advantages of
certain of AEGON’s products, including group savings products.
Any changes in United States or Dutch tax law affecting
products could have a material adverse effect on AEGON's
business, results of operations and financial condition.
LITIGATION
AEGON faces significant risks of litigation and regulatory
investigations and actions in connection with AEGON’s
activities as an insurer, securities issuer, employer, investment
advisor, investor and taxpayer. Lawsuits, including class actions
and regulatory actions, may be difficult to assess or quantify,
may seek recovery of very large and/or indeterminate
amounts, including punitive and treble damages, and their
existence and magnitude may remain unknown for substantial
periods of time. A substantial legal liability or a significant
regulatory action could have a material adverse effect on
AEGON’s business, results of operations and financial condition.
CHANGES IN ACCOUNTING PRINCIPLES
AEGON’s financial statements are prepared and presented
in accordance with Dutch accounting principles. Any change
in these accounting principles, such as the discontinuation
of the indirect income method as of January 1, 2004, and
the conversion to IFRS in 2005, may have a material impact
on AEGON’s reported results, financial condition and
shareholders’ equity.
The Hague, March 1 1, 2004
The Executive Board
RISK MANAGEMENT AND RISK FACTORS
AEGON GROUP ANNUAL REPORT 2003 41AEGON GROUP ANNUAL REPORT 2003 41
AEGON AROUND THE WORLDINFORMATION ABOUT PRODUCTS ANDCOUNTRY UNITS
AEGON GROUP ANNUAL REPORT 2003 42
GENERAL ACCOUNT
With general account life insurance products, AEGON
typically carries the investment risk, earns a spread (the
difference between investment performance and crediting
rates to the customers), realizes mortality results or
targets a combination thereof.
TRADITIONAL LIFE
Traditional life products contributed 48% of AEGON’s income
before tax in 2003 (67% in 2002 and 43% in 2001). Traditional
life consists of permanent and term life insurance. These
products are marketed to individuals, pension funds,
companies and banks, through (independent) agents, brokers,
direct response, worksite marketing and financial institutions
in the United States, the Netherlands, the United Kingdom,
Canada, Hungary, Spain and Taiwan.
Permanent life insurance provides life-long financial
protection. Most permanent policies have a cash value feature
with a minimum rate guarantee that accumulates tax-deferred
over the life of the policy and can be used to help fund
financial goals, particularly in retirement. A customer can
either withdraw the cash value subject to any early
withdrawal charges or receive the benefit upon a pre-
determined event, such as the death of the insured. Whole life
insurance is a common form of permanent life insurance,
where premiums generally remain constant over the life of the
policy. Universal life insurance is another form of permanent
life insurance that has either a flexible or single premium. The
contract has an adjustable benefit feature that allows the
customer greater flexibility on when to pay premiums and the
amount of the premium, subject to a minimum and a
maximum. For universal life products, the more the customer
pays in premium, the greater the cash value will be. The
interest rate at which the cash value accumulates is adjusted
periodically. Universal life insurance has a stated minimum
interest rate that will be paid on the policy’s cash value. An
indexed version of universal life is also offered where the
credited rate is tied to the change, either positive or negative,
in a designated stock market index. There is no minimum
interest for indexed universal life. Universal life products are
sold to individuals, pension funds, companies and banks.
Term life insurance provides protection for a certain period
of time and allows the customer to select the duration of
coverage and the amount of protection. The policy pays death
benefits only if the customer dies during the specified term.
Term policies do not accumulate a cash value. The policies can
usually be renewed upon expiration and premiums normally
increase upon renewal. Certain term life insurance products
sold in the United States (such as mortgage insurance and
credit life insurance) provide a death benefit that decreases
over the term period, based on a stated method. The rate of
decrease usually corresponds with the decrease in the
principal balance of the loan.
Traditional life products also include life insurance sold as
part of defined benefit pension plans, endowment policies and
post-retirement annuity products. Bank- or company-owned life
insurance (BOLI/COLI) funds the costs of employee benefits,
usually with key employees of the company as the insured
persons.
FIXED ANNUITIES
Fixed annuities contributed 13% of AEGON’s income before tax
in 2003 (8% in 2002 and 10% in 2001). Fixed annuities are
marketed to individuals and pension funds through financial
institutions, (independent) agents and brokers in the United
States and Canada and through direct response in the
United States.
A fixed annuity is an annuity contract guaranteeing the
customer a fixed minimum payout. The fixed annuity products
AEGON USA offers include deferred or immediate annuities,
which may be purchased on either a flexible or single premium
basis. An immediate annuity is usually purchased with a single
lump sum premium payment and the benefit payments begin
within a year after the purchase. Deferred annuities are
offered on a fixed or indexed basis and the benefit payments
will begin at a future date. Upon maturity of the annuity, the
customer can select payout options, including a lump sum
payment or income for life or for a period of time. Should the
customer die prior to receiving the benefits of the policy, the
beneficiary receives the accumulated cash value death benefit.
The customer can surrender the annuity prior to maturity and
receive the cash value less surrender charges. Fixed annuities
have a specified rate of interest that can be reset periodically
by AEGON.
A multi-strategy annuity allows a customer a choice of
investment strategies to allocate funds and provides an
1 Income before tax in this section refers to income before tax excluding interest charges andother and the income of Transamerica Finance Corporation.
AEGON GROUP ANNUAL REPORT 2003 43
GICS AND FUNDING AGREEMENTS
* tax qualified** non-tax qualified
Guaranteed investment contracts (GICs) and funding
agreements (FAs) contributed 8% of AEGON’s income before
tax in 2003 (13% in 2002 and 6% in 2001). GICs and FAs are
marketed only to institutional investors such as pension funds,
retirement plans, college savings programs, money market
funds, municipalities and United States and overseas investors.
GICs are primarily sold to tax qualified plans while FAs are
typically sold to non-tax qualified institutional investors. The
products are marketed directly and through brokers and
independent agents in the United States and internationally
from the United States.
GICs and FAs are spread-based products that are generally
issued on a fixed or floating rate basis and provide the customer
a return of principal and a guaranteed rate of interest. For
some of the products, the customer receives a return based on
a change in a published index, such as the S&P 500. The term
of the contract can be fixed (primarily from six months up to
ten years) or it can have an indefinite maturity. Contracts with
an indefinite maturity provide the customer with a put option
whereby the contract will be terminated with advance notice
ranging from three to thirteen months.
ACCOUNT OF POLICYHOLDERS
Products for the account of policyholders are those where
the policyholders carry the investment risk. AEGON earns
management, administration and guarantee fees and
mortality results on these products.
LIFE FOR ACCOUNT OF POLICYHOLDERS
Life products for account of policyholders contributed 15% of
AEGON’s income before tax in 2003 (17% in 2002 and 17% in
2001). These products are sold to individuals through
1 Income before tax in this section refers to income before tax excluding interest charges andother and the income of Transamerica Finance Corporation.
UnitedGENERAL ACCOUNT United States Canada Netherlands Kingdom Hungary Spain Taiwan
Traditional life
Fixed annuities
GICs and funding agreements*
ACCOUNT OF POLICYHOLDERS
Life for account of policyholders
Variable annuities
Fee business
Banking
Accident and health insurance
General insurance
*Also distributed internationally from the United States
AEGON GROUP ANNUAL REPORT 2003 46
PRODUCT LINE OVERVIEW1
EARNINGS CONTRIBUTION 2003 2002 2001
GENERAL ACCOUNT
Traditional life 1,218 1,457 1,557
Fixed annuities 334 174 358
GICs and funding agreements 213 272 215
1,765 1,903 2,130
ACCOUNT OF POLICYHOLDERS
Life for account of policyholders 378 371 632
Variable annuities 63 –462 120
Fee business 6 2 94
447 –89 846
OTHER ACTIVITIES
Accident and health insurance 283 278 209
General insurance 61 62 67
Banking 20 8 45
Book profit Mexico – – 343
364 348 664
TOTAL INCOME BEFORE TAX 2,576 2,162 3,640
1 Income before tax in this section refers to income before tax excluding interest charges andother and the income of Transamerica Finance Corporation.
SUPERVISION
Individual companies in the AEGON Group are each subject to
solvency supervision in their respective home countries. Based
on European Commission legislation (Directive 98/79/EC)
adopted in 1998, the supervisory authorities in the Netherlands
(Pensioen- en Verzekeringskamer, or PVK) are, as lead
supervisors, also required to carry out ‘supplementary
supervision’. The supplementary supervision of insurance
companies in an insurance group enables the lead supervisors
to make a detailed assessment of the financial position of the
insurance companies that are part of that group. The Directive
requires the PVK to take into account the relevant financial
affiliations between the insurance companies and other
entities in the group. In this respect, AEGON is required to
submit reports to the PVK twice a year setting out all the
significant transactions and positions between the insurance
and non-insurance companies in the AEGON Group.
Both the insurance and banking companies in the AEGON
Group are also required to maintain a minimum solvency
margin based on local requirements. The required solvency
margin is the sum of the margins of each of AEGON’s
insurance and banking subsidiaries, based on the requirements
of European directives. Available liability capital includes
shareholders’ equity, capital securities and subordinated loans.
AEGON GROUP ANNUAL REPORT 2003 47
GENERAL HISTORY
AEGON’s operations in the Americas comprise of AEGON
USA and AEGON Canada and are referred to collectively
as AEGON Americas.
AEGON USA was formed in 1989 when AEGON decided
to consolidate the United States holding companies under
one financial services holding company. Business operations
are conducted through life insurance subsidiaries of
AEGON USA Inc., Commonwealth General and
Transamerica Corporation. Products are offered through
several primary life insurance subsidiaries, with licenses
in every state of the United States, the District of
Columbia, Puerto Rico, the Virgin Islands and Guam.
Reference to AEGON, or AEGON USA, generally means
one or more of its operating subsidiaries.
The primary insurance subsidiaries in the United States, all of
which are wholly owned, are:
• Transamerica Financial Life Insurance Company, Inc.,
Purchase (New York USA)
• Life Investors Insurance Company of America, Cedar
Rapids (Iowa USA)
• Monumental Life Insurance Company, Baltimore
(Maryland USA)
• Peoples Benefit Life Insurance Company, Cedar Rapids
1.1311 0.9468 Translation rate EUR/USD: weighted average exchange rate
The cash flow statement has been set up according to the indirect method. Only those changes affecting liquid assets have been takeninto account. The effects of revaluation and currency exchange rate differences have therefore not been included. Currency exchangerate differences had a significant negative impact on liquid assets denominated in foreign currencies.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
These financial statements have been drawn up in accordance with the rules for financial statements of insurance companies in theNetherlands, embodied in Title 9, Book 2 of the Dutch Civil Code. A summarized consolidated income statement has been added to therequired balance sheet and profit and loss account in order to present a comprehensible view of the results of the AEGON Group(AEGON).
AEGON is exposed to a variety of risks. Some risks are related to the international nature of AEGON’s business, such as currencytranslation risk. Other risks include insurance related risks, such as changes in mortality and morbidity. However, the largest exposure isto changes in financial markets (i.e. interest rate, credit and equity market risks), that affect the value of the investments and technicalprovisions (including deferred policy acquisition costs) .For detailed information about risks and sensitivity of AEGON to movements in the interest rate markets, the currency markets and theequity and real estate markets, and their effects on net income and shareholders’ equity, refer to the review of risk factors on page 33and following.
Application of the accounting policies in the preparation of the annual accounts requires management to use judgements involvingassumptions and estimates concerning future results or other developments including the likelihood, timing or amount of futuretransactions or events. There can be no assurance that actual results will not differ from those estimates. Accounting policies that arecritical to the financial statement presentation and that require significant judgement or involve complex estimates are the policiesconcerning the determination of default provisions for fixed rate investments, the other than temporary impairments of equity securities,the technical provisions for life insurance including amortization of deferred policy acquisition costs, the provisions for minimum benefitguarantees, and the pension expense. For further explanation refer to the notes of the related items.
As of the financial year 2003, the market value of stock appreciation rights is recognized as a liability in the balance sheet. Valuationis at market value with changes in the value recognized in the income statement under expenses. This accounting method is inaccordance with International Reporting Standards. As the related plans had no value at year-end 2002, the application of theseguidelines does not affect the comparative figures.
As was announced in the 2002 annual report, the accounting for capital gains and losses on shares and real estate will be changed in2004. With International Financial Reporting Standards (IFRS) becoming AEGON’s required reporting standard in 2005, AEGON hasdecided to discontinue the indirect income method of accounting for capital gains and losses. As of January 1, 2004, capital gains andlosses will be recognized as earnings in the income statement when realized. Reported indirect income and the realized capital gains andlosses for the last three years were as follows:
RealizedIndirect capital gains
Amounts in EUR millions income and losses
2003 631 (270)
2002 758 (1,343)
2001 723 (507)
The realized portion of the revaluation account at December 31, 2003 amounting to EUR 1,281 million will be transferred directly to thesurplus fund as of January 1, 2004 and the change will not have an effect on the level of shareholders’ equity.
In these financial statements the breakdown of revenues in the income statement has been changed, showing on a separate line therevenues from the distribution and the asset management operations. This change has no effect on the financial position and results.The comparative figures have been adjusted accordingly.
With effect from January 1, 2003, the balance sheets and income statements of the Meeùs group, consisting of intermediary and realestate management and brokerage companies, and of a number of smaller distribution companies for financial products all established inthe Netherlands, have been fully consolidated. The consolidation follows on from the decision no longer to undertake efforts to achieve abusiness combination with third parties for these companies.
On May 9, 2003, the extraordinary General Meeting of Shareholders approved certain changes to the corporate governance ofAEGON. It was decided to no longer voluntarily apply the ”large company regime” of the Dutch corporate code, to change therelationship with Vereniging AEGON and to increase the authority of AEGON N.V.’s shareholders. One of the changes concerns thecorporate body that is authorized to adopt the annual accounts. Under the new corporate governance the General Meeting ofShareholders is the body that shall adopt the annual accounts, instead of the Supervisory Board, as was the case under the ”largecompany regime”. Due to this change the dividend on preferred shares will not be accrued as of the end of 2003 since the liability canonly be determined after the adoption of the annual accounts by the General Meeting of Shareholders.
On May 9, 2002, AEGON and the China National Offshore Oil Corporation (CNOOC) announced the establishment of a joint venturefor life insurance activities in China. CNOOC and AEGON entered this joint venture as equal partners and each contributed 50% to theinitial capital base of approximately EUR 27 million. The joint venture’s headquarters are located in Shanghai. After receiving regulatoryapproval operations started in 2003.
On August 5, 2003, AEGON announced an agreement to sell most of the commercial lending business of Transamerica FinanceCorporation (TFC) to GE Commercial Finance. The sale price of approximately USD 5.4 billion resulted in an after-tax book gain of aroundUSD 200 million. On January 14, 2004, the transaction was closed and the book gain will be added directly to shareholders’ equity in2004. Therefore the 2003 annual accounts fully include on a non-consolidated basis the assets, liabilities and results for thesebusinesses.
AEGON GROUP ANNUAL REPORT 2003 84
AEGON GROUP ANNUAL REPORT 2003 85
On October 2, 2003, AEGON completed the sale of Transamerica Finance Corporation’s real estate tax service and flood hazardcertification businesses to The First American Corporation for a total cash sale price of USD 400 million. As part of the transaction,TFC’s real estate tax service subsidiary has distributed assets valued at USD 246 million to TFC. The sale of the two TFC subsidiaries,combined with the asset distribution transaction, resulted in an after-tax book gain of USD 347 million, which was added directly toshareholders’ equity against the invested capital charged earlier to equity as goodwill.
The remaining businesses of TFC primarily consist of maritime container and European trailer leasing, which will be consolidated asof the first quarter 2004. Due to the reduced size of these activities, consolidation will no longer be incompatible with the insightrequired by law.
CONSOLIDATION PRINCIPLES
In the consolidated financial statements of AEGON N.V., all group companies have been included, except for some group companieswhose aggregate financial effect is relatively insignificant or which are not intended to be held long-term. Group companies, theconsolidation of which would not result in a fair view of the group because of dissimilar activities, are also not consolidated. Theconsolidated financial statements of these latter companies have been added separately in the notes. Their results are presented in theincome statements on a separate line.Consolidated entities also include special purpose entities set up in connection with the sale of investment products in the United States.Participations in joint ventures have been consolidated proportionally.Due to their insignificance, minority interests are included under other current liabilities.A list of names and locations of the most important group companies is given on page 134.With regard to the income statements of AEGON N.V., article 402, Book 2 of the Dutch Civil Code has been applied, allowing a simplifiedformat.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY
Assets and liabilities denominated in foreign currencies are converted into euro at the year-end exchange rates. Currency exchange ratedifferences resulting from the conversion of foreign currencies investments in shares and real estate are accounted for in shareholders’equity.Income statement items in foreign currencies are converted at the weighted average currency exchange rates for the reporting period.Calculation differences resulting from using year-end exchange rates in the balance sheet and weighted average exchange rates in theincome statement are charged or credited directly to shareholders’ equity under the caption currency exchange rate differences.Equity held in subsidiaries not accounted for in euro, to the level of self-imposed requirements applied within the group, is not hedgedagainst currency exchange rate movements. Equity amounts in excess of these requirements held in subsidiaries can be hedged. Allcurrency results related to equity held in subsidiaries and the funding thereof, including results and related costs from hedgingtransactions on those subsidiaries, are accounted for in shareholders’ equity under the caption currency exchange rate differences.Other currency exchange rate differences are included in the income statements.
The most important closing rates at December 31 are:2003 2002
US Dollar (USD) 1.26300 1.04870
Swiss Franc (CHF) 1.55790 1.45240
Pound Sterling (GBP) 0.70480 0.65050
Canadian Dollar (CAD) 1.62340 1.65500
Japanese Yen (JPY) 135.05000 124.39000
Hungarian Forint (HUF) 262.50000 235.90000
Taiwan Dollar (NTD) 42.88000 36.11000
Weighted average exchange rates applied for income statement items:2003 2002 2001
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
ACCOUNTING PRINCIPLES
Where not otherwise stated, balance sheet items are carried at face value. If necessary, provisions for expected future losses oninvestments and for bad and doubtful debts are deducted.
Provisions for future losses on fixed income investments (bonds, mortgage loans and private placements) are established forexpected defaults or other credit related issues. The provisions reflect management’s judgement about possible defaults and is basedupon a variety of factors, including expectations for long-term default rates and pricing assumptions.For bonds and private placements, industry sectors and individual debt investments are monitored regularly for signs of impairment,including length of time and extent to which the market value has been less than cost, industry risk factors, financial condition and near-term prospects of the issuer, and rating changes of locally recognized credit rating agencies. Additionally for asset-backed securities andloans, cash flow trends and underlying levels of collateral are monitored. A specific security or loan is considered to be impaired when itis determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. Consideration isalso given to management’s intent and ability to hold a security or loan until maturity or until market value will recover.
Credit risk on mortgages is monitored by assessing delay of payment classification combined with a related level of provision. Other asset provisions are formed when credit risk emerges. Assets identified with potential credit issues are monitored and placed on awatch list. Discussions about those assets on the watch list are held on a regular basis to determine necessary updates.
In the United States, a reduction in the carrying value is made and charged against any default provision when impairment of aspecific fixed income investment is determined. The determination of the amount of the write-down is based upon management’s bestestimate of the future recoverable value of the fixed income investment and takes into account underlying collateral or estimations ofthe liquidation values of the issuers. In the other countries the provision is accrued until the receivable has legally ceased to exist.
Assets and liabilities from banking activities and gains and losses on these activities are accounted for in accordance with theregulations for banks. The impact on group equity and net income from the differences in accounting principles compared to the rulesapplied at insurance companies is not material.
1 REAL ESTATE2003 2002
Real estate for own use 255 345
Other real estate 2,011 1,866
2,266 2,211
Real estate is shown at market value, which is the selling value under normal market circumstances. Each property is valued at leastonce in every 5 year period. Valuation is largely based on external appraisal. In 2003 98% of the portfolio was valued.New property is valued at construction cost including interest during the construction period, or at purchase price.Unrealized and realized gains and losses on real estate investments as well as results, expenses and currency exchange rate differencesfrom hedging transactions are recognized in the revaluation account, taking into account the related (deferred) taxes. The impairmentsfor the financial year amounted to EUR 79 million (2002: nil). Under the indirect income method, this loss has been recognized in therealized part of the revaluation account with offset in the unrealized part of the revaluation account.The participation in the real estate joint venture AMVEST Vastgoed is accounted for under this caption.Purchase price of the portfolio amounts to EUR 1,591 million (2002: EUR 1,799 million).
2 GROUP COMPANIES AND PARTICIPATIONS2003 2002
Shares in group companies:Transamerica Finance Corporation 684 873
Other group companies 160 153
Total group companies 844 1,026
Loans to/(from) group companies:Transamerica Finance Corporation 1,989 2,342
Other group companies (48) 77
Total loans to/(from) group companies 1,941 2,419
Other participations 93 105
Loans to other participations 6 6
TOTAL 2,884 3,556
Interests in companies in which AEGON is able to influence operating policy but has no control, as well as group companies which are notconsolidated because of their relative financial insignificance, are accounted for by inclusion of AEGON’s proportion of the equity and thenet income of the companies, based on AEGON accounting principles. Loans to group companies and other participations are valued atface value.
AEGON GROUP ANNUAL REPORT 2003 87
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
Interests in short-term holdings are valued at cost less provisions where necessary. Dividends declared are included in the consolidatedincome statements.The interest in the Transamerica non-insurance businesses (Transamerica Finance Corporation) is accounted for under shares in groupcompanies at net asset value. These group companies are not consolidated because the nature of their business is dissimilar to the restof the AEGON Group businesses. Consolidated financial statements of Transamerica Finance Corporation are presented on page 121 andfollowing.
MOVEMENTS IN GROUP COMPANIES AND PARTICIPATIONS Shares in group companies Loans to group companiesand participations and participations
2003 2002 2003 2002
Balance at January 1 1,131 1,403 2,425 1,877
Capital contribution and acquisitions 102 169 53 903
Divestitures and redemptions (629) (316) (6) 0
Net income for the financial year 290 87 0 0Dividend distributed (23) (11) 0 0
Bonds and other fixed rate securities 71,576 75,697
Loans guaranteed by mortgages 16,748 18,568
Other loans 18,710 21,632
Deposits with credit institutions 1,349 1,577
Other financial investments 3,967 4,566
118,895 128,364
SHARES 6,545 6,324
Shares, non-redeemable preferred shares and convertible debentures reported under this caption are valued at their quoted price or, ifunquoted, at estimated market value.Unrealized and realized gains and losses on shares as well as results, expenses and currency exchange rate differences from hedgingtransactions are recognized in the revaluation account, taking into account the related (deferred) taxes.
Cost Unrealized Marketprice gains losses value
Amounts at December 31,2003 5,540 1,097 (92) 6,545
2002 6,069 853 (598) 6,324
For shares whose market value is considered to be impaired on an ’other than temporary’ (durable) basis, a realized loss is recorded.Shares are generally considered to be other than temporarily impaired if the market value is 20% below cost for a period of at least sixmonths. However, independent third party documentation about the financial condition, near-term prospects of the issuer and the intentand ability to retain the investment for a period of time sufficient to allow for any anticipated recovery, are also important factors takeninto account. These factors typically require significant management judgement. The impairments for the financial year amounted toEUR 273 million (2002: EUR 1,057 million). Under the indirect income method, this loss has been recognized in the realized part of therevaluation account with offset in the unrealized part of the revaluation account. When an optional dividend is taken in shares, an amount equal to the cash dividend is credited to income.The participation in AEGON Global Investment Fund N.V. is also accounted for under this caption.Shares and convertible debentures lent out are included and amount to EUR 826 million (2002: EUR 651 million). No shares andconvertible debentures were borrowed.
AEGON GROUP ANNUAL REPORT 2003 88
AEGON GROUP ANNUAL REPORT 2003 89
The composition by industry categories of shares in an unrealized loss position at December 31 is presented in the table below.
Carrying value of shareswith gross unrealized losses Gross unrealized losses
2003 2002 2003 2002
Funds 160 161 (14) (37)
Cyclical consumer 39 117 (10) (22)
Financials 205 459 (7) (45)
Non-cyclical consumer 77 800 (5) (80)
Cyclical services 94 257 (4) (47)
Industries 63 120 (4) (20)
Non-cyclical services 21 126 (2) (24)
Technology 14 73 (2) (7)
Transportation 13 0 (1) 0
Communications 17 37 (1) (5)
Resources 1 74 0 (15)
Other - limited partnerships 165 209 (33) (256)
Other 117 393 (9) (40)
Total shares in an unrealized loss position 986 2,826 (92) (598)
2003 2002
BONDS AND OTHER FIXED RATE SECURITIES 71,576 75,697
Bonds are shown at amortized cost less provisions for uncollectable amounts, representing the cash value at the balance sheet date offuture interest and principal repayment components based on the effective interest rate on the date of acquisition.Included in other fixed rate securities are redeemable preferred shares and money market investments. Redeemable preferred shares arevalued at amortized cost; money market investments are valued at cost.Realized gains and losses from transactions within the bonds and private placements portfolios, unless a loss is considered a default loss,are deferred and released to the income statements in annual installments over the estimated average remaining maturity term of theinvestments sold. In the United States a reduction in the carrying value is made for bonds which are in default or have experienced a significantdowngrade in their credit rating or a significant decline in their market value. Such reductions are charged against the bond defaultprovision. In the other countries the provision is accrued until the receivable has legally ceased to exist.
2003 2002
Redemption value of the bonds 73,677 76,496
Deferred purchase differences (5,054) (4,931)
Amortization value bonds 68,623 71,565
Other fixed rate securities 2,953 4,132
71,576 75,697
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
The carrying value and market value of bonds and other fixed rate securities are as follows:
Carrying Unrealized Marketvalue gains losses value
Amounts at December 31, 2003US government 2,945 38 (25) 2,958
Amounts at December 31, 2002US government 4,505 103 (17) 4,591
Dutch government 670 42 (1) 711
Other government 4,419 301 (15) 4,705Mortgage backed securities 16,169 472 (311) 16,330Corporate bonds 49,934 3,250 (961) 52,223
Total 75,697 4,168 (1,305) 78,560
The carrying value and market value of bonds and other fixed rate securities by contractual maturity at December 31, 2003 are as follows:
Carrying Marketvalue value
Due in one year or less 4,202 4,243
Due after one year through five years 17,858 18,575
Due after five years through ten years 25,315 26,511
Due after ten years 24,201 25,343
Total 71,576 74,672
For a proper understanding it should be noted that the market value is not part of the matching of these investments with the relatedinsurance liabilities, which are not stated at market value either.The doubtful debts provision for bonds and other fixed rate securities not yet written down amounts to EUR 194 million (2002: EUR 249 million).
Bonds and other fixed rate securities lent out are included and amount to a carrying value of EUR 3,784 million (2002: EUR 5,469 million). No bonds and other fixed rate securities were borrowed.
2003 2002
LOANS GUARANTEED BY MORTGAGES 16,748 18,568
Loans guaranteed by mortgages are valued at redemption value. Discounts granted are deferred and amortized to income over thecontractual period of interest fixation.Market value of the portfolio amounts to EUR 18,01 1 million (2002: EUR 20,039 million). As no market exists for these investments,market value is calculated based on current interest rate, maturity and risk assumptions. For a proper understanding it should be notedthat this market value is not part of the matching of these investments with the related insurance liabilities, which are not stated atmarket value either.The provision for doubtful debts for these investments amounts to EUR 47 million (2002: EUR 38 million).
2003 2002
OTHER LOANS 18,710 21,632
Other loans represent private placements, which are shown at amortized cost less provisions for uncollectable amounts. Amortized costrepresents the cash value at the balance sheet date of future interest and principal repayment components based on the effectiveinterest rate on the date of acquisition.
AEGON GROUP ANNUAL REPORT 2003 90
Realized gains and losses from transactions within the private placements and bond portfolios valued at amortized cost are, unless theloss is considered a default loss, deferred and released to the income statements in annual installments over the estimated averageremaining term to maturity of the investments sold. In the United States a reduction in the carrying value is made for loans which are in default or have experienced a significant downgradein their credit rating. Such reductions are charged against the loans default provision. In the other countries the provision is accrueduntil the receivable has legally ceased to exist.
2003 2002
Redemption value 21,360 22,231
Deferred purchase differences (2,650) (599)
Amortization value 18,710 21,632
The carrying value and market value of private placements are as follows:Carrying Unrealized Market
The carrying value and market value of private placements by contractual maturity at December 31, 2003 are as follows:
Carrying Marketvalue value
Due in one year or less 1,209 1,224
Due after one year through five years 5,551 5,765
Due after five years through ten years 6,634 6,920
Due after ten years 5,316 5,428
Total 18,710 19,337
As no market exists for these investments, market value is calculated based on current interest rates, term to maturity and riskassumptions. Asset-backed loan agreements are priced by outside brokers and corporate private placements are matrix priced primarilywith spreads and interest rates from outside sources. In isolated instances, spreads or prices are adjusted for credit specific issues.These assets are valued similarly to a forced sale, therefore large discounts are included for liquidity premiums and the uniqueness ofeach deal.For a proper understanding it should be noted that the market value is not part of the matching of these investments with the relatedinsurance liabilities, which are not stated at market value either.The provision for doubtful debts for not yet written-down private placements was nil (2002: EUR 32 million).
2003 2002
DEPOSITS WITH CREDIT INSTITUTIONS 1,349 1,577
This item relates to amounts that can be called up after a minimum period of one year.Market value of the deposits is equated with book value.
AEGON GROUP ANNUAL REPORT 2003 91
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
2003 2002
OTHER FINANCIAL INVESTMENTS
Policy loans 1,369 1,636
Receivables from share lease agreements and others 2,598 2,930
3,967 4,566
Market value of policy loans is set equal to book value. The market value of receivables from share lease agreements and othersamounts to EUR 2,595 million (2002: EUR 2,672 million).The provision for doubtful debts amounts to EUR 19 million (2002: EUR 17 million).
4 DEPOSITS WITH CEDING UNDERTAKINGS2003 2002
33 33
Debentures related to reinsurance contracts that are not at free disposal.Market value amounts to EUR 33 million (2002: EUR 33 million).
CHANGES IN INVESTMENTSCurrencyexchange
rateBalance at Disposed differences Balance atJanuary 1, and Revalu- and other December
2003 Acquired redeemed ations changes 31, 2003
Real estate 2,211 180 (243) 104 14 2,266
Group companies and participations 3,556 155 (635) 0 (192) 2,884
Shares 6,324 1,648 (1,441) 575 (561) 6,545
Bonds and other fixed rate securities 75,697 82,292 (76,085) 0 (10,328) 71,576
Loans guaranteed by mortgages 18,568 3,995 (3,717)2 0 (2,098) 16,748
Other loans 21,632 9,113 (8,794) 0 (3,241) 18,710
Deposits with credit institutions 1,577 434 (655) 0 (7) 1,349
Other financial investments 4,566 1,071 (1,233) 0 (437) 3,967
Deposits with ceding undertakings 33 1 0 0 (1) 33
TOTAL 134,164 98,889 (92,803) 679 (16,851) 124,078
BALANCES AND CHANGES OF 2002 141,445 105,048 (94,064) (1,560) (16,705)1 134,164
1 Including reallocation from investments for account of policyholders for an amount of EUR 1,278 million due to the final settlement of the Diversified Investment Advisorsacquisition.
2 Of which a decrease of EUR 2.3 billion due to securitizations.
The composition by industry categories of bonds, other fixed rate securities and private placements in an unrealized loss position atDecember 31 is presented in the table below.
Carrying value of bonds, other fixed rate securities and private placements
with gross unrealized losses Gross unrealized losses
Total bonds, other fixed rate securities and private placements in an unrealized loss position 21,671 19,769 (743) (2,152)
AEGON GROUP ANNUAL REPORT 2003 92
OVERVIEW DEFAULT PROVISIONS FOR INVESTMENTSAdditioncharged Charged
Balance at to income for Other Balance atJanuary 1 statement default movements December 31
2003
Bonds and other fixed rate securities 249 435 (440) (50) 194
Loans guaranteed by mortgages 38 24 (20) 5 47
Other loans 32 (29) (3) 0 0
Other financial investments 17 1 (1) 2 19
TOTAL 336 431 (464) (43) 260
2002
Bonds and other fixed rate securities 238 818 (744) (63) 249
Loans guaranteed by mortgages 53 2 (11) (6) 38
Other loans 75 8 (3) (48) 32
Other financial investments 34 2 (3) (16) 17
TOTAL 400 830 (761) (133) 336
5 INVESTMENTS FOR ACCOUNT OF POLICYHOLDERS
Investments for account of policyholders and insurance-linked savings deposits are investments of which the investment risk is borne bythe policyholders. They are valued at market value. Separated investments for group life contracts with full profit sharing are valuedaccording to the terms of the related contracts. For more information refer to note 15 on page 101.Total return of these investments is accounted for in the technical account life insurance on a separate line.
2003 2002
Balance at January 1 94,728 113,272
Acquired 25,177 31,452
Disposed and redeemed (21,068) (25,918)
Investment income including revaluations 12,858 (11,524)
Currency exchange rate differences and other changes (11,606) (12,554)1
BALANCE AT DECEMBER 31 100,089 94,728
1 Including reallocation to the general account investments for an amount of EUR 1,278 million due to the final settlement of the Diversified Investment Advisors acquisition.
6 RECEIVABLES OUT OF DIRECT INSURANCE2003 2002
Policyholders 2,425 1,666
Agents 100 449
TOTAL RECEIVABLES OUT OF DIRECT INSURANCE 2,525 2,115
The provision for doubtful debts for these receivables amounts to EUR 135 million (2002: EUR 149 million).
7 OTHER RECEIVABLES2003 2002
Investment receivables 481 110
Taxes and social security 131 0
Other 475 1,028
TOTAL OTHER RECEIVABLES 1,087 1,138
Other receivables mature within one year. The provision for doubtful debts for other receivables amounts to EUR 43 million (2002: EUR 1 1 million).
AEGON GROUP ANNUAL REPORT 2003 93
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
8 EQUIPMENT
Equipment is shown at original cost less depreciation over the estimated useful life.Office
Data furnitureprocessing and other Total
systems equipment equipment
Total cost of equipment 843
Accumulated depreciation (450)
Balance at January 1, 2003 305 88 393
Investments 56 41 97
Depreciation (87) (29) (116)
Disposals and other changes (36) (19) (55)
BALANCE AT DECEMBER 31, 2003 238 81 319
Accumulated depreciation 458
Total cost of equipment 777
9 LIQUID ASSETS2003 2002
Cash on hand and balances with banks 980 1,146
Short-term investments 665 441
TOTAL LIQUID ASSETS 1,645 1,587
Liquid assets are at free disposal.
10 OTHER PREPAYMENTS AND ACCRUED INCOME2003 2002
Prepaid pension costs on employee plans 1,450 1,730
Other prepayments and accrued income 231 215
TOTAL OTHER PREPAYMENTS AND ACCRUED INCOME 1,681 1,945
For an explanation of the prepaid pension costs on employee plans, refer to page 1 16.
11 SHAREHOLDERS’ EQUITY
For the notes to the share capital, reserves, stock appreciation rights and stock options, refer to page 137 and following.
Interest rate 7 7⁄8%, coupon date September 29 2005 114 114
Interest rate 7 3⁄4%, coupon date December 15 2005 136 136
Interest rate 7 1⁄8%, coupon date March 4 2011 203 203
Interest rate 7 5⁄8%, coupon date July 10 2008 114 114
Interest rate 7 1⁄4%, coupon date October 14 2008 136 136
Interest rate 6 7⁄8%, coupon date December 20 2005 700 700
TOTAL PERPETUAL CUMULATIVE SUBORDINATED DEBENTURE LOANS 1,517 1,517
1 Year of first call.
The coupons for the EUR 1 14 million 8% bonds are set at 8% until June 8, 2005. The coupons for the EUR 203 million 7 1⁄8% bonds areset at 7 1⁄8% until March 4, 201 1, while the EUR 136 million 7 1⁄4% bonds are set at 7 1⁄4% until October 14, 2008. On these dates, and afterevery consecutive period of ten years, the coupons will be reset at the then prevailing yield of 9-10 year Dutch government bonds plus asurcharge of 0.85%. The coupons of the other four loans are fixed.The loans have the same subordination provisions as dated subordinated debt. In addition, the conditions of the loans contain certainprovisions for interest deferral and for the availability of principal amounts to meet losses.Although the loans have no stated maturity, AEGON has the right to call the loans for redemption at par for the first time on the coupondate in the years as specified above. AEGON has the right to call the loans for redemption at par on every tenth year thereafter on thecoupon date, with the exception of the EUR 700 million 6 7⁄8% bond. This bond is callable every year on the coupon date after the initialcall date in 2005.The market value of these loans amounts to EUR 1,589 million (2002: EUR 1,573 million).
2003 2002
TRUST PASS-THROUGH SECURITIES
This item comprises the following loansUSD 100 million 7 4⁄5% Capital Trust Pass-through Securities 1996/2026 79 95
USD 225 million 7 13⁄20% Capital Trust Pass-through Securities 1996/2026 178 215
USD 190 million 7 5⁄8% Capital Trust Pass-through Securities 1997/2037 151 181
TOTAL TRUST PASS-THROUGH SECURITIES 408 491
Capital Trust Pass-through Securities (TRUPS) are securities through which the holders participate in a trust. The assets of these trustsconsist of junior subordinated deferrable interest debentures of Transamerica Corporation. The trusts have been included in theconsolidated financial statements. The TRUPS carry certain provisions with regard to deferral of distributions. Earlier redemption ispossible for the USD 100 million 7 4⁄5% TRUPS on or after December 1, 2006.The market value of these loans amounts to EUR 509 million (2002: EUR 686 million).
13 SUBORDINATED LOANSRemaining terms
between between over Total Total1-3 years 4-5 years 5 years 2003 2002
These loans are subordinated to all other liabilities and borrowings. The interest rates vary from 6.51% to 8.25%.The market value of these loans amounts to EUR 495 million (2002: EUR 647 million).
AEGON GROUP ANNUAL REPORT 2003 95
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
14 TECHNICAL PROVISIONS
ExchangeBalance Increase rate Balance
at charged to fluctuations atJanuary 1, the income and other December
2003 statement changes 31, 2003
LIFE INSURANCE:
Life insurance 49,245 2,257 (5,312) 46,190
Fixed annuities 40,063 1,798 (6,306)1 35,555
GICs and funding agreements 24,755 676 (3,888)2 21,543
Unearned premiums and unexpired risks 1,782 168 (269) 1,681
Deferred policy acquisition costs (1,109) (947)
673 734
Claims outstanding 1,840 156 (173) 1,823
SUBTOTAL NON-LIFE INSURANCE 2,513 2,557
PROFIT SHARING AND REBATES 304 306
OTHER 512 0 16 528
TOTAL 102,914 5,055 93,871
1 Of which the balance of deposits and withdrawals is EUR 625 million.2 Of which the balance of deposits and withdrawals is EUR 170 million.
LIFE INSURANCE
The provision for life insurance represents the present value of future benefits to be paid to, or on behalf of policyholders and relatedexpenses less the present value of future net premiums. The provision is calculated using actuarial methods that include assumptionssuch as estimates of premiums, mortality, investment performance, lapses, surrenders and expenses. These assumptions are initiallybased on best estimates of future experience at policy inception date, in some instances taking into account a margin for the risk ofadverse deviation. The assumptions used are regularly reviewed, compared to actual experience and, if necessary and depending on thetype of products, updated.Included in premiums is a loading for expenses. When the premiums are actually received or become receivable, the loadings emerge andare available to offset actual expenses, including maintenance expenses, non-deferrable acquisition expenses and amortization of thedeferred policy acquisition costs (DPAC). For products that have guaranteed benefits over the lifetime of the policy or at maturity, the premiums also include loadings for theexpected cost of the guarantee. The pricing of the guarantee is based on assumptions for future investment performance, includingreinvestment assumptions. Part of the risk is covered by reinsurance contracts.
The provision for life insurance comprises also the provision for unexpired risks as well as the provision for claims outstanding. Incase the premium-paying period is shorter than the lifetime of the policy, a provision for future expenses is set up to cover anyestimated future expenses after the premium-paying period. Future costs in connection with benefit payments are also provided for.
The technical provision for life reinsurance assumed is included in this provision as well, and amounts to EUR 2,404 million (2002:EUR 2,966 million).
The average interest rate used is 5.18% (2002: 5.04%). Taking into account the capitalized interest rate rebates, the average interestrate used is 5.38% (2002: 5.25%).
In various countries products are sold that contain minimum guarantees. For these products the regular technical provision isrecognized under technical provisions with investments for account of policyholders. The technical provision life insurance includesprovisions for guaranteed minimum benefits related to contracts where the policyholder otherwise bears the investment risk. The mainguarantees are summarized below:
Amounts in millions 2003 2002
PROVISIONS
Guaranteed minimum benefits on variable products in the United States USD 285 269
Guaranteed minimum accumulation benefits on segregated funds in Canada CAD 166 126
Guaranteed return on certain ‘fund plan’ and group life products in The Netherlands EUR 278 236
AEGON GROUP ANNUAL REPORT 2003 96
In the United States, a common feature in variable annuities is a guaranteed minimum death benefit (GMDB). This means that when theinsured dies, the beneficiaries receive either the account balance or the guaranteed amount, whichever is higher. The latter is calculatedusing the total deposits made by the contract holder less any withdrawals and sometimes includes a roll-up or step-up feature thatincreases the guarantee with interest or with increases in the account value, respectively. The provision for life insurance includes a provision in connection with the guarantees issued. A cap and a floor for this provision iscalculated using stochastic prospective methods (probability weighted calculation using multiple future scenarios) and currentassumptions. Within the cap and floor corridor, the accrual method based on pricing assumptions with valuation interest less actualclaims incurred is followed. Outside the cap and floor corridor, a surplus or shortfall of the provision will cause an extra credit or chargeto the income statement.
In Canada, the variable annuity products sold are known as segregated funds. Segregated funds are similar to mutual funds, but witha ”capital protection guarantee” for mortality and maturity. The initial guarantee period is 10 years. The 10 year period may be reset atthe clients’ option. The management expense ratios (MERs) applied to the funds are not guaranteed and can be increased at AEGON’sdiscretion. The provisions for the minimum guarantees on segregated funds are established consistent with the method described for theminimum guarantees on the variable annuity contracts sold in the United States.
In the Netherlands, Fundplan policies have a guaranteed return of 3% or 4% at maturity or upon the death of the insured if premiumpaid for a consecutive period of ten years is invested in the Mix Fund and/or the Fixed Income Fund. For this guaranteed return aprovision is established based on stochastic modelling. The provision is developed applying the accrual method based on pricingassumptions less actual claims incurred. A corridor for the provision is determined regularly based on stochastic modelling methods. Ifthe provision develops outside the corridor, a charge or credit to the income statement is recorded. Minimum interest guarantees ongroup pension contracts in the Netherlands are given for nominal benefits, based on the 3% or 4% actuarial interest, after retirement ofthe employees. Due to the nature of the product, these guarantees have a long-term horizon of about 30 to 60 years. The provision isdeveloped applying the accrual method based on pricing assumptions less actual deductions.
Provisions for fixed annuities relate to annuity contracts sold in the United States and Canada. Fixed annuities are typically singlepremium insurance products where the paid-in amounts accumulate with interest credits less applicable loads or fees. The interestcrediting rate is fixed during a period, at the end of which it can be reset by the company. The funds grow on a tax deferred basis andhave significant long-term savings characteristics. The benefit reserves are equal to the full accumulated contract values.
The provision for GICs and funding agreements is the amount due for these products which are sold in the United States to a broadarray of institutional customers including defined contribution plans, defined benefit plans, public employee plans, municipalities, moneymarket funds, and United States and overseas investors. GICs are generally issued to tax-qualified plans while funding agreements areissued to non-qualified institutional investors both in domestic and international markets. AEGON utilizes consolidated special purposeentities linked to medium term notes or asset backed commercial paper for the issuance of certain funding agreements. Under theseprograms, the proceeds of each note series or commercial paper issuance are used to purchase a funding agreement from an AEGONinsurance company, which is used to secure that particular series. The payment terms of any particular series substantially match thepayment terms of the funding agreement that secures that series. The benefit provisions are equal to the full accumulated contractvalues.
The account balances at December 31, 2003 consist of fixed rate, fixed maturity contracts (45%), floating rate, indeterminatematurity contracts (22%), floating rate, fixed maturity contracts (28%), and market indexed, fixed maturity contracts (5%). Most of thefixed rate contracts are swapped to floating rate via swap agreements. Credited interest on floating rate contracts reset mostly on amonthly basis on various indices. Indeterminate maturity contracts allow the customer to withdraw funds with advance notice periodsranging from three to thirteen months without a withdrawal penalty. Market indexed contracts provide a return based on the marketperformance of a designated index, such as the S&P 500. Futures or swap contracts are used to hedge the market risk and effectivelyconvert the contracts to a floating rate.
Major components of GICs and funding agreements are summarized as follows:
2003 2002
Liabilities for GICs and funding agreements:Guaranteed investment contracts issued to defined contribution/benefit plans 3,386 4,782
Medium Term Note funding agreements issued to a special purpose entity 6,444 7,424
Total liabilities for GICs and funding agreements 21,543 24,755
AEGON GROUP ANNUAL REPORT 2003 97
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
The following table presents provisions for guaranteed investment contracts and funding agreements by withdrawal regulation:
2003 2002
Book value out1
Putable:90 days’ put 1,281 1,650
180 days’ put 634 764
364 days’+ put 2,835 3,310
Total putable 4,750 5,724
Market value out2
90 days’ notice 953 1,370
180 days’ notice 173 120
Total market value out 1,126 1,490
Not putable or surrenderable 15,667 17,541
Total GICs and funding agreements 21,543 24,755
1 Book value out: the amount equal to the sum of deposits less withdrawals with interest accrued at the contractual interest rate.2 Market value out: the amount equal to the book value out plus a market value adjustment to adjust for changes in interest rates.
The municipal/governmental funding agreements generally include downgrade pursuant to which, should various downgrade events betriggered, one of the following four options must be followed:- transfer contract to a higher rated party- purchase a credit enhancement- collateralize the underlying position- pay the contract out at book value
These options are negotiated with the customer at contract issuance but AEGON unilaterally retains the ultimate decision-makingcapability in the event of a downgrade. Available collateral is monitored to ensure the company would be able to utilize this option at itsdiscretion.
As of December 31, 2003, the contractual maturities for all contracts with defined maturities were for 2004: EUR 3,733 million; for 2005: EUR 3,289 million; for 2006: EUR 2,855 million; for 2007: EUR 2,031 million; for 2008: EUR 940 million; and thereafterEUR 3,917 million.
2003 2002
DEFERRED POLICY ACQUISITION COSTS
Balance at January 1 14,089 15,264
Deferred during the year 1,847 2,486
Amortization charged to the income statement1 (1,455) (1,520)
Other changes2 (2,034) (2,141)
BALANCE AT DECEMBER 31 12,447 14,089
Of which value of business acquired life (VOBA) 3,706 4,968
1 Of which accelerated amortization is EUR 129 million (2002: EUR 450 million).2 Mainly caused by currency exchange rate differences.
These policy acquisition costs are costs that are directly or indirectly related to the acquisition of new or renewal life insurancecontracts. Such costs consist principally of commissions, certain marketing, underwriting and contract issue expenses. Policy acquisitioncosts are deferred (DPAC) to the extent that they are recoverable from future expense charges in the premiums or from expected grossprofits, depending on the nature of the contract. Acquisition costs are also deferred for certain non-insurance investment type productsrelated to 401(k) plans in the United States. DPAC are deducted from the technical provision life insurance.
For fixed premium products, DPAC are amortized to the income statement in proportion to the premium revenue recognized. Theamortization of DPAC is based on management’s best estimate assumptions established at policy issue, including assumptions formortality, lapses, expenses and investment returns. A margin for adverse deviation is included in the assumptions. DPAC are tested bycountry unit and product line to assess recoverability at least annually. The portion of DPAC that is determined to be not recoverable willbe recognized as an expense in the income statement in the period of determination.
For flexible premium products, including fixed and variable annuities, variable universal life and unit-linked contracts, amortization ofDPAC is based on expected gross profits, which are determined based on management’s best estimates as to future expectations. Theseestimates include but are not limited to: an economic perspective in terms of long-term bonds and equity returns, mortality, disabilityand lapse assumptions, maintenance expenses, and future expected inflation rates. DPAC for flexible premium insurance contracts andinvestment type contracts are amortized in proportion to the emergence of estimated gross profits over the life of the contracts.
AEGON GROUP ANNUAL REPORT 2003 98
Movements in equity markets can have a significant impact on the value of the flexible contract accounts and the fees earned on theseaccounts. As a result estimated future gross profits increase or decrease with these movements. Similarly, changes in interest ratespreads for fixed annuity products (interest credited less interest earned) will affect management’s assumptions with respect toestimated gross profits.
In the United States (and Canada), DPAC are amortized at a constant rate based on the present value of the estimated gross profitamounts expected to be realized over the life of the policies. If appropriate, the assumptions included in the determination of estimatedgross profits are adjusted. A significant assumption related to estimated gross profits on variable annuities and life insurance products isthe annual net long-term growth rate of the underlying assets. As equity markets do not move in a systematic manner, assumptions aremade as to the net long-term growth rate after considering the net effects of short-term variances from the long-term assumptions (a”reversion to the mean” assumption). At December 31, 2003 the reversion to the mean assumptions for variable products, primarilyannuities in the United States, were as follows: gross long-term equity growth rate was 9% (2002: 9%), gross short term growth rate was7 1⁄2% (2002: 12%), the reversion period for the short term rate is five years, the gross short and long term fixed security growth ratewas 6% and the gross short and long term growth rate for money market funds was 3 1⁄2%. For Canada these assumptions, at December31, 2003, were as follows: gross long-term equity growth rate was 9 1⁄2% (2002: 9 1⁄2%), gross short-term growth rate was 10 3⁄4% (2002:12 1⁄2%). The reconsideration of assumptions may affect the original DPAC amortization schedule, referred to as DPAC unlocking. Thedifference between the original DPAC amortization schedule and the revised schedule, which is based upon estimates of actual andfuture gross profits, is recognized in the income statement as an expense or a benefit in the period of determination.
In the Netherlands, the United Kingdom and other countries the impact of equity market movements on estimated gross profits iscovered by the yearly or, if appropriate, quarterly recoverability testing; a negative outcome is charged to the income statement in theperiod of determination. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted for futureperiods.
Included in the DPAC is an amount of value of business acquired (VOBA) resulting from acquisitions, which is equal to the presentvalue of estimated future profits of insurance policies in force related to business acquired at the time of the acquisition and is in itsnature the same as deferred policy acquisition costs and also subject to the same recoverability testing. The VOBA is amortized againstexpense loadings included in the premiums of the acquired portfolios or for acquired unit-linked business against charges arising fromthe related acquired business.
The changes in the carrying value of the VOBA (life and non-life) were as follows:
2003 2002
Balance at January 1 5,347 7,158
Amortization charged to the income statement (444) (719)
Other changes1 (953) (1,092)
BALANCE AT DECEMBER 31 3,950 5,347
1 Mainly caused by currency exchange rate differences.
2003 2002
UNAMORTIZED INTEREST RATE REBATES
Balance at January 1 389 424
Rebates granted during the year 38 50
Amortization charged to the income statement (72) (84)
Other changes 6 (1)
BALANCE AT DECEMBER 31 361 389
Interest rate rebates granted are amortized over the period of the contracts concerned in yearly increasing amounts.
AEGON GROUP ANNUAL REPORT 2003 99
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
NON-LIFE INSURANCE
Unearned premiums represent the unearned part of premiums received for both property and casualty insurance and for accident andhealth insurance. The provision for unexpired risks includes a provision to compensate for the increasing age of persons insured underhealth and personal accident policies.
2003 2002
DEFERRED POLICY ACQUISITION COSTS
Balance at January 1 1,109 1,202
Deferred during the year 291 401
Amortization charged to the income statement (273) (328)
Other changes1 (180) (166)
BALANCE AT DECEMBER 31 947 1,109
Of which value of business acquired non-life (VOBA) 244 379
1 Mainly caused by currency exchange rate differences.
These policy acquisition costs are costs that are directly or indirectly related to the conclusion or renewal of non-life insurance contracts.The deferred policy acquisition costs are deducted from the technical provision for unearned premiums and include both renewalcommission paid related to unearned premiums, amortized over the related premium period, and first year commission on healthinsurance policies, amortized over the contract period.
2003 2002
CLAIMS OUTSTANDING
Balance at January 1 2,315 2,398
Less reinsurance recoverables (475) (486)
Net balance 1,840 1,912
Incurred related to:— current year 1,363 1,506
— prior years (25) 18
Total incurred 1,338 1,524
Paid related to:— current year (654) (738)
— prior years (553) (700)
Total paid (1,207) (1,438)
Other changes (148) (158)
Net balance at December 31:— current year 710 768
— prior years 1,113 1,072
1,823 1,840
Plus reinsurance recoverables 421 475
BALANCE AT DECEMBER 31 2,244 2,315
The provision for claims outstanding relates to claims incurred in the current and previous years, still unsettled at year-end. Calculationtakes place either on an item by item basis or on the basis of statistical information, taking into account claims incurred but not yetreported. In calculating the provision, the future costs of processing claims are considered.A different method is applied to marine, aviation and transport insurance. The calculation is based on the ’underwriting years system’with premiums deferred and claims combined in a fund.
PROFIT SHARING AND REBATES
This provision consists of the amounts earmarked for insured or beneficiaries, as far as their accounts have not yet been credited.
OTHER TECHNICAL PROVISIONS
This consists mainly of insurance deposits under Dutch group life contracts, which are designated for improvement of retirementbenefits under such contracts. Maturity is undetermined. Interest credited to such deposits is linked with the average yield on long-termDutch government bonds.
AEGON GROUP ANNUAL REPORT 2003 100
REINSURANCE AMOUNT CEDED
The following amounts on account of reinsurance ceded have been deducted from the technical provisions:
2003 2002
Life insurance 2,075 2,193
Unearned premiums and unexpired risks 318 322
Claims outstanding 421 475
2,814 2,990
Reinsurance premiums, commissions and claims settlements, as well as technical provisions relating to reinsurance, are accounted for inthe same way as the original contracts for which the reinsurance was concluded. Reinsurers’ share in technical provisions resulting fromreinsurance agreements are deducted from the liabilities relating to the original insurance contracts.At December 31, 2003, there were no reinsurance receivables associated with a single reinsurer with a carrying value in excess of 5% oftotal assets.
AEGON insurance subsidiaries cede premiums to other insurers under various agreements that cover individual risks, group risks ordefined blocks of business, on a coinsurance, yearly renewable term, quote share, excess or catastrophe excess basis. These reinsuranceagreements spread the risk and reduce the effect of losses. The amount of each risk retained depends on its evaluation of the specificrisk, subject, in certain circumstances, to maximum limits based on characteristics of coverages. Under the terms of the reinsuranceagreements, the reinsurer agrees to reimburse the ceded amount in the event the claim is paid. However, AEGON insurance subsidiariesremain liable to their policyholders with respect to ceded insurance if any reinsurer fails to meet the obligations assumed by it. To limitthis risk, reinsurance treaties are entered into with only well capitalized, highly rated reinsurers. Where deemed appropriate additionalprotection is arranged through letters of credit or trust arrangements.
AEGON UK also uses reinsurance to offer pension contract holders access to a number of external fund management organizations.Under these contracts, which relate to unit-linked business, the unit liability is reinsured to the third party organization. The credit riskrelating to the investments is borne by the pension contract holders while AEGON UK retains ultimate credit risk relating to the externalfund managers.
15 TECHNICAL PROVISIONS WITH INVESTMENTS FOR ACCOUNT OF POLICYHOLDERSExchange
Increase rateBalance at debited to fluctuations Balance atJanuary 1, the income and other December
2003 statement changes 31, 2003
Provisions gross 95,904 102,176
Ceded to reinsurers (1,176) (2,087)
PROVISIONS FOR INSURANCE OF WHICH THE POLICYHOLDER BEARS THE
INVESTMENT RISK AND FOR INSURANCE-LINKED SAVINGS DEPOSITS 94,728 14,141 (8,780) 100,089
This provision includes variable annuities, variable universal life, unit-linked insurance contracts, separate investment funds group life,insurance-linked savings deposits and the liabilities of AEGON UK with-profit funds (EUR 23,180 million). The amount of EUR 14,141 milliondebited to the income statement is the total of premium receipt and benefits of EUR 1,283 million and the investment income for accountof policyholders amounting to EUR 12,858 million.The provisions are generally shown at book value of the related investments. The provisions include an amount of EUR 1,465 million (2002: EUR 1,239 million) for pension provisions regarding own employees,primarily in the Netherlands and the United Kingdom.As some products have a minimum guaranteed benefit amount, a provision for this benefit is accumulated during the term of the relatedportfolio and has been included in the technical provisions life insurance.
AEGON GROUP ANNUAL REPORT 2003 101
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
16 PROVISIONS2003 2002
Provisions for taxation 1,753 1,824
The provisions for taxation are of a long-term nature. This caption includes both deferred taxation as well as other long-term taxliabilities.
The deferred taxation is calculated on the basis of the difference between book value and valuation for tax purposes of theappropriate assets and liabilities. Deferred tax assets are recognized to the extent that it is probable that future taxable profits will beavailable.
The provision is equal to the discounted value of the future tax amounts. In the calculation discounted tax rates ranging from 0% tonominal rates are used, taking into account the estimated term to maturity of the related differences.Nominal value of these tax amounts is EUR 2,423 million.
As at December 31, the provisions for taxation consist of:
TOTAL LONG-TERM LIABILITIES 1,225 1,152 1,080 1,235 4,692 3,856
The repayment periods of borrowings vary from in excess of one year up to a maximum of 50 years. The coupons vary from 1.49% to10% per annum. Borrowings include debenture loans for EUR 2,837 million.The market value of total long-term liabilities amounts to EUR 5,053 million (2002: EUR 3,679 million).
AEGON GROUP ANNUAL REPORT 2003 102
The following table provides the detail of long-term liabilities:
1 Of which EUR (58) million relate to AEGON N.V. (2002: EUR 82 million).
18 OTHER PAYABLES2003 2002
Investment creditors and other creditors 1,710 1,185
Taxes and social security 0 165
Other 1,981 2,136
TOTAL OTHER PAYABLES 3,691 3,486
19 ACCRUALS AND DEFERRED INCOME2003 2002
Accrued interest 675 459
Deferred gains and losses on fixed rate investments 1,223 431
TOTAL ACCRUALS AND DEFERRED INCOME 1,898 890
CAPITAL AND SOLVENCY
AEGON’s capital base reflects the capital employed in insurance activities and consists of shareholders’ equity, capital securities anddated subordinated and senior debt. AEGON manages its capital base to comprise at least 70% shareholders’ equity, between 5% and15% capital securities, and a maximum of 25% subordinated and senior debt.
2003 in % 2002 in %
Shareholders’ equity 14,132 71.4 14,231 70.9
Capital securities 1,925 9.7 2,008 10.0
Subordinated loans 452 2.3 616 3.1
Senior debt related to insurance activities 3,288 16.6 3,203 16.0
Total capital base 19,797 100.0 20,058 100.0
AEGON GROUP ANNUAL REPORT 2003 103
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
Both insurance and banking companies are required to maintain a minimum solvency margin based on local directives. AEGON’sinsurance subsidiaries in the United States are subject to risk based capital standards, established by the National Association ofInsurance Commissioners (NAIC). At December 31, 2003, the combined risk based capital ratio of AEGON’s life insurance subsidiaries inthe United States was 330%. Under the Insurance Industry Supervision Act 1993 in the Netherlands, life insurance companies arerequired to maintain equity of 4% of general account technical provisions and, in case of no interest guarantee, 1% of technicalprovisions with investments for account of policyholders. At December 31, 2003, the solvency as a percentage of the locally requiredsolvency margin was well in excess of the minimum ratio. The Financial Services Authority (FSA) regulates insurance companies in theUnited Kingdom under the Financial Services and Markets Act 2000 and sets minimum standards for capital adequacy and solvency. AtDecember 31, 2003, the free assets ratio of Scottish Equitable plc was 1 1%.
The required solvency margin shown below is the sum of the individual margins of all AEGON’s insurance and banking companiesbased on European directives. Liability capital available includes shareholders’ equity, capital securities and subordinated loans of thegroup. The solvency position of the group has been outlined in the following table:
2003 2002
Liability capital of the group 16,509 16,855
Required solvency margin 7,354 7,825
Solvency surplus 9,155 9,030
Solvency as a percentage of required solvency margin 224 215
AEGON is subject to legal restrictions on the amount of dividends it can pay to its shareholders. Under Dutch law the amount that isavailable to pay dividends consists of total shareholders’ equity less the issued and outstanding capital and less the reserves required bylaw. At December 31, 2003, the issued and outstanding capital is EUR 238 million, the reserves required by law amount to EUR 1,393million and EUR 12,501 million is available for dividends. However, certain of AEGON’s subsidiaries, principally insurance companies, aresubject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to their parent companies.While management does not believe such restrictions on AEGON’s subsidiaries will affect its ability to pay dividends in the future, therecan be no assurance that these restrictions will not limit or prevent AEGON from doing so.
DERIVATIVES
AEGON uses common derivative financial instruments such as swaps, options, futures and cross-currency derivatives to hedge itsexposures related to investments, liabilities and borrowings. In general, the accounting treatment of derivatives mirrors the accountingtreatment of the underlying financial instrument. In the balance sheet, the book values of the derivatives are recognized under thecaptions of the related underlying financial instrument. Foreign currency amounts are converted at the year-end exchange rates.Realized and unrealized results on derivative financial instruments are recognized in the same period and likewise as the results of therelated investments, liabilities and debt.
Interest rate contracts, which include swaps, swaptions, caps, floors and forward rate agreements are used to manage AEGON’sexposure to interest rate risks. These contracts are designated individually or in groups to specific assets, liabilities or borrowings atinception of the contracts.
An interest rate swap is an agreement between two parties to exchange, at specific dates, the difference between a fixed interestrate and/or a floating interest rate payment on a predetermined principal amount. An interest rate basis swap generally provides for theexchange of the difference between a floating interest rate on one index to a floating interest rate of another index on a pre-determinedprincipal amount. The principal amount is not exchanged, and usually the fixed and floating payments are netted, thus limiting actualcash outlay. The differential to be paid or received is recognized as an adjustment to interest expense over the term of the contract.AEGON may also enter into forward-starting interest rate swaps to lock-in the current forward rate. The accrual of income begins at theforward date, rather than at the inception date.
A swaption is an option to enter into an interest rate swap at a specific future date. A call or receiver swaption is the right but notthe obligation to receive the fixed rate payments and a put or payer swaption is the right but not the obligation to pay the fixed ratepayments on a certain interest rate swap. By entering into swaption contracts, AEGON is able to lock-in future interest rates and thuslimiting reinvestment risk. Premiums paid for swaptions are deferred and amortized to interest expense on a straight-line basis over theterm of the contract.
An interest rate cap is an agreement under which the seller, in return for an upfront payment, agrees to pay the buyer the differencebetween the higher market interest rate and a certain strike rate or cap for a certain period of time on a specified notional amount.Under an interest rate floor agreement, the seller pays the buyer if the interest rates are below the specified strike rate or floor. Interestrate caps are used to limit the impact of rising rates, whereas interest rate floors are used to ensure minimum interest income whenrates decline. Premiums paid for purchased interest rate cap or floor agreements are capitalized and amortized to interest expense overthe term of the contract.
Forward rate agreements are commitments to purchase or sell a financial instrument at a future date for a specific price and areused to hedge short-term interest movements, in particular, for future investments or short-term borrowings. Forward rate agreementssettle in cash at a specific future date based on the differential between agreed interest rates applied to a notional amount. Payments orreceipts are recognized as interest income or interest charge at the moment of cash settlement.
AEGON GROUP ANNUAL REPORT 2003 104
Cross currency swap agreements are contracts to exchange two principal amounts of two currencies at the prevailing exchange rate atinception of the contract. During the life of the swap the counterparties exchange fixed or floating rate interest payments in the swappedcurrencies and at maturity the principal amounts are again swapped at a pre-determined rate of exchange. Cross currency swaps areused to manage the company’s exposure to foreign exchange rate fluctuations of both assets and liabilities. AEGON uses cross currencyswaps to allow investments, product offerings and borrowings to be made in foreign currencies, gaining access to additional markets andsources of funding while eliminating foreign exchange risk. Cross currency swaps are recognized in the balance sheet as an adjustmentto long-term liabilities and in the income statement in investment income, benefits to policyholders or miscellaneous income andexpenditure - currency exchange rate differences. The amount recognized represents the currency exchange difference on the notionalamount at period-end rates.
A forward foreign exchange contract is an agreement that obligates its parties to deliver certain quantities of currencies at aspecified exchange rate at a specified future date. These contracts are primarily used to hedge foreign currency risk of investments.
An equity swap is a swap agreement in which one party makes payments based on either a floating index or a fixed-rate, while theother party makes payments based on the return of an equity index, basket, or single stock. Equity swaps (excluding the total returnswap agreement between AEGON N.V. and Vereniging AEGON) are valued at market value with changes going through the incomestatement.
Options are contracts that give the option purchaser the right, but not the obligation, to buy or sell, at or before a specified futuredate, a financial instrument at a specified price. Purchased options are carried at market value, while options sold are carried at thepremium received. Unrealized gains (losses) on options are recognized in equity or current liabilities.
Futures contracts are carried at market value and require daily cash settlement. Changes in the market value of interest rate futuresthat qualify as hedges are deferred and recognized as an adjustment of the hedged item, while changes in the market value of equityfutures are recognized in income.
Credit derivatives are contracts between two parties that allow for transfer of credit risk from one party to another. The partytransferring risk away has to pay a fee to the party that takes the risk. A commonly used credit derivative instrument is a credit defaultswap. A credit default swap allows the transfer of third party credit risk from one party to another. In essence, the buyer of a creditdefault swap is insured against third party credit losses. If the third party defaults, the party providing insurance will have to purchasethe defaulted asset from the insured party. In turn, the insurer pays the insured the remaining interest on the debt and the principal.Credit derivatives are used to hedge credit exposures or to create synthetic credit exposure. Credit derivatives have also been used to add credit risk by selling credit protection in the form of single name credit default swaps andAAA rated tranches of synthetic collateralized debt obligations. Credit derivatives are also used to synthetically replicate corporatecredit exposures. This involves the purchase of high quality low risk assets and the sale of credit derivatives. The program is designed topurchase credits that are already subject to review by AEGON’s bond credit desk but may not be available under the same terms andconditions in the cash bond market.
AEGON engages in both exchange-traded derivatives contracts as well as over-the-counter (OTC) derivatives transactions. Because ofits OTC derivatives positions, AEGON is exposed to counterparty credit risk. Counterparty credit risk is the risk of loss from acounterparty failing to meet its obligations according to the terms of the contract. AEGON continually monitors its position and thecredit ratings of the counterparties to these derivative instruments. AEGON believes the risk of loss due to nonperformance by itscounterparties is low due to their high credit quality. All OTC transactions are governed by ISDA Master Agreements, which allow fornetting of positions with one specific counterparty.
The following table represents aggregate notional amounts of derivatives, held in the general account portfolio. The amounts listedfor interest rate contracts will not be exchanged by parties and, thus, do not reflect an exposure of the company to market movements.The amounts listed for cross currency swaps will be exchanged at amounts calculated on the basis of the notional amounts and theterms of the derivatives, which are related to interest rates, exchange rates and/or certain indices.
Notional Market Book Notional Market Bookamounts value value amounts value value
NOTES TO THE CONSOLIDATED BALANCE SHEETSAmounts in EUR millions
COMMITMENTS AND CONTINGENCIES
2003 2002
INVESTMENTS CONTRACTED
Real estate (5) (100)
Mortgage loans 392 366
Bonds and registered debentures:Purchase 0 0
Sale (51) 0
Private placements 16 84
Other:Purchase 451 552
Sale 0 0
FUTURE LEASE PAYMENTS
Under non-cancellable operating lease contracts for office buildings, future minimum lease payments amount to:
2003 2002
Less than one year 77 64
Between one and five years 212 218
More than five years 194 342
483 624
A significant portion of operating leases is for agency and administration offices.
2003 2002
COLLATERAL AND GUARANTEES GIVEN TO THIRD PARTIES
Bonds and registered debentures 2,373 2,435
Ceded and securitized mortgage loans 5,091 3,792
Standby letters of credit 964 1,022
Guarantees 287 316
Other commitments 827 955
Other collateral and guarantees 559 0
The bonds and other fixed rate investments function mainly as collateral granted by AEGON subsidiaries abroad, to meet legalrequirements and also include collateral guarantees given by subsidiaries under reciprocal insurance contracts. The guarantees on cededand securitized mortgage loans cover the interest rate risk at early redemption of these loans.
Standby letters of credit amounts reflected above are the liquidity commitment notional amounts. AEGON enters into agreements toprovide liquidity for high quality multi-seller asset backed commercial paper conduits and municipal variable rate demand note facilities.Management does not anticipate any future funding requirements that would have a material effect on reported financial results.
A significant portion of the guarantees represent an agreement with a fund of funds manager to pay 50% of the excess of theamount of principal protection over the value of the fund of fund assets at the maturity of the principal protection instrument. AtDecember 31, 2003, the notional amount of the principal protection was EUR 271 million, which represents the maximum amount ofpotential future payments (undiscounted). AEGON earns a fee in exchange for providing the principal protection and, at December 31,2003, the maturities of the underlying fund portfolios were for 2004: EUR 19 million; for 2005: EUR 21 million; for 2006: EUR 120 million;2007: EUR 63 million; for 2008: EUR 41 million; and thereafter EUR 7 million. The underlying fund portfolios are restricted as toinvestment instruments held and are required, upon a decline in value below a formula based threshold, to replace the assets with fixedincome instruments in order to minimize the principal protection liability. Accordingly, management does not anticipate any futurefunding requirements with respect to the principal protection that would have a material effect on reported financial results.
Guarantees further include guarantees given on account of asset management commitments. In this regard, besides the guaranteesshown in the table, guarantees have been given for unlimited amounts.
Other commitments include private placement commitments, mortgage loan commitments, and limited partnership commitments.Certain insurance and investment products have minimum guarantees for which provisions have been made in the technical
provisions and are therefore not included in the above table. These guarantees are discussed in note 14.AEGON has also guaranteed certain credit lines and commercial paper of Transamerica Finance Corporation. These guarantees
are not included in the above table. Transamerica Finance Corporation had EUR 2,256 million in commercial paper outstanding atDecember 31, 2003.
AEGON GROUP ANNUAL REPORT 2003 106
OFF BALANCE SHEET ASSETS
As part of its core operations, AEGON concludes transactions and has relationships with institutional and retail customers for a varietyof financial services. The return for these services is a fee related to the asset value, to the investment performance or to the riskexposure of the contract.The services include:- management of investments for institutional investors and of mutual funds in the retail business;- offering of synthetic GICs which guarantee to plan sponsors benefit responsiveness, whether or not in the form of annuities, in theevent that qualified plan benefit requests exceed plan cash flows. The plan sponsor agrees to reimburse for such benefit payments withinterest.For all services the related assets are owned by the customers and therefore they do not appear on the balance sheet of AEGON. Totalassets involved in these operations amount to EUR 63 billion (USD 79 billion), (2002: EUR 52 billion, USD 55 billion).
AEGON Levensverzekering N.V. completed two privately placed securitization programs in 2002 whereby the economic ownership ofEUR 1.7 billion of aggregate mortgage receivables was conveyed to third parties. The transfer of the ownership title will take place uponnotification of the borrowers by either AEGON or the third parties. The third parties have the right to notify the borrowers upon theoccurrence of certain pre-defined ’notification events’. A first preferred ’silent’ right of pledge on the mortgage receivables was given tothe third parties. At the same time AEGON entered into a fixed-floating swap agreement with the contract parties under which AEGONagreed to pay the floating rate (EURIBOR based) and receive the fixed rate (scheduled yield from the mortgage receivables). Under bothprograms AEGON received the right to repurchase all of the mortgage receivables at a price equal to the then current portfolio marketvalue of the receivables provided that AEGON simultaneously terminates the swap upon payment of the market value of the swap. Forone program that right exists for the remainder of the term. The other program only allowed AEGON to repurchase the receivablesbetween March 2003 and September 2003 and no longer permits AEGON this right.
AEGON Levensverzekering N.V. completed two publicly placed securitization programs in 2003 whereby the economic ownership ofEUR 2.3 billion of aggregate mortgage receivables was conveyed to two special purpose companies. Both companies funded thispurchase with the issue of mortgage backed securities. The transfer of the ownership title will take place upon notification of theborrowers by either AEGON or the special purpose companies. The special purpose companies have the right to notify the borrowersupon the occurrence of certain pre-defined ’notification events’. A first preferred ’silent’ right of pledge on the mortgage receivables wasgiven to the special purpose companies. At the same time AEGON entered into a fixed-floating swap agreement with the contract partiesunder which AEGON agreed to pay the floating rate (EURIBOR based) and receive the fixed rate (scheduled yield from the mortgagereceivables). For both programs, after a period of seven years, the interest of the notes, issued by the special purpose companies willstep-up, together with a similar step-up in the fixed-floating swap agreement. At this time, the special purpose companies have the rightto call the notes.
In 2003, one of the privately placed securitizations from 2002 was called by AEGON Levensverzekering N.V. and bought back atmarket value. AEGON Levensverzekering N.V. now has a total of three publicly placed and two privately placed securitization programsoutstanding with a total size of EUR 5 billion.
LITIGATION
Banque Internationale à Luxembourg S.A. and Dexia Bank Belgium S.A. (Dexia) initiated legal proceedings against AEGON in connectionwith its acquisition in 2000 of Labouchere, at that time a subsidiary company of AEGON. Dexia alleges that AEGON made certainmisrepresentations and breached some of the warranties contained in the purchase agreement. The alleged misrepresentations andbreaches of warranties relate to the securities leasing products sold by Labouchere. Dexia’s claims include a claim for dissolution of theagreement and damages and, if honoured by the competent courts, may result in substantial damage to AEGON. AEGON has taken theview that the sale of Labouchere to Dexia constitutes a transaction between two large financial institutions that was duly effected andthat Dexia’s allegations are without merit. In view thereof, and given that the amount of damages due in case any of the claims of Dexiawould succeed cannot be determined, no provision has been made for these claims in the annual accounts for 2003.
In January and February 2003, AEGON and certain current and former members of the Executive Board were named in a series ofsimilar class action complaints filed in US federal court alleging various violations of US securities laws involving the issuance of falseand misleading statements during the period between August 9, 2001, and July 22, 2002, when AEGON issued an update to its earningsguidance for 2002. AEGON believes these allegations are without merit and intends to defend vigorously against these actions, whichhave been consolidated. AEGON does not believe that these claims, either individually or in the aggregate, will result in a materialadverse effect on its financial position or results of operations.
AEGON and some of its subsidiaries and affiliates are involved in litigation in the ordinary course of business, including litigationwhere compensatory or punitive damages and mass or class relief are sought. The outcome of litigation is, at times, unpredictable. It ismanagement's opinion, after consultation with legal counsel, that damages arising from such litigation will not have a material adverseeffect on either the financial position or the results of operations.
AEGON GROUP ANNUAL REPORT 2003 107
NOTES TO THE CONSOLIDATED INCOME STATEMENTSAmounts in EUR millions
DETERMINATION OF RESULTS
The principles for the determination of results are described in the notes to the balance sheets. Additionally, certain principles forspecific income statement items are described in this section.
GROSS PREMIUMS
Gross premiums, including recurring and single premiums, from all types of life insurance, both general account and with investments foraccount of policyholders, incoming life reinsurance and non-life insurance are recognized as revenues when they become receivable.Premium to reinsurers have not been deducted. Not reflected as premium revenues are deposits from certain products that are sold inthe United States and Canada such as deferred annuities, immediate annuities without life contingency and GICs and fundingagreements. For these products the surrender charges and charges assessed have been included in gross premium life insurance.
INVESTMENT INCOME AND INCOME FROM BANKING ACTIVITIES
Investment income is recognized as revenue on an accrued basis for all interest bearing assets. Investment income includes changes inthe amortized cost basis of investments and amortization of deferred gains and losses on fixed rate investments. It also includes netearnings from group companies and participations (excluding Transamerica Finance Corporation), actual dividends received and rentalincome due. Also the indirect income on shares and real estate is recognized as investment income.Income from banking activities includes investment income and other income from banking operations.Fees and commissions from asset management services and mutual funds and from sales activities are recognized as revenue over theperiod in which the services are performed or the sales have been closed.
In the income statement the structural total return on investments in shares and real estate is recognized. This total return includesthe direct income (rents and dividends) of the reporting period and an amount of indirect income.The total return is calculated by determining the average of the total return yield over the last 30 years and multiplying this averageyield by the average value of these investments over the last seven years, adjusted for investment purchases and sales.The indirect income from these investments is then calculated as the difference between the total return and the direct income.
REINSURANCE
AEGON is involved in both ceded and assumed reinsurance. This includes separate life reinsurance operations as well as within the lifeand non-life operations ceded and assumed reinsurance agreements to spread risk and to limit exposure on large risks. Premiums forreinsurance assumed are included in premium revenues, premiums for reinsurance ceded are shown separately as a charge on the faceof the income statement.
The effects of reinsurance on premiums are:
2003 2002 2001Life Non-life Total Life Non-life Total Life Non-life Total
NOTES TO THE CONSOLIDATED INCOME STATEMENTSAmounts in EUR millions
COMBINED RATIOS (in %) Marine,Legal transport
Accident liability Other and General Other& health motor motor aviation Fire liability branches Total
2003
Americas 107 — — — — — — 107
The Netherlands 87 128 91 96 97 118 106 100
Other Countries 95 93 67 120 93 120 57 93
TOTAL 105 111 94 96 95 119 80 103
2002
Americas 106 — — — — — — 106
The Netherlands 95 117 100 98 109 101 67 103
Other Countries 96 102 104 191 94 120 55 97
TOTAL 105 110 102 99 102 105 61 105
2001
Americas 99 — — — 77 — — 99
The Netherlands 94 114 95 99 106 92 64 100
Other Countries 94 103 105 67 98 127 — 99
TOTAL 99 109 98 99 102 99 64 100
The combined ratio is the sum of the ratio of net incurred claims to net premiums earned and the ratio of net commissions and expensesto premiums own account.Although a ratio over 100% suggests a loss, the ratio does not include investment income. With the inclusion of investment income inthe calculation, all of AEGON’s major product lines were profitable during the periods presented.
AEGON GROUP ANNUAL REPORT 2003 112
22 INVESTMENT INCOME Non-Life Non-life technical Total
2003
Income from participations 60 0 13 73
Group companies:Income from other investments
Real estate1 114 1 1 116
Shares 181 1 0 182
Bonds and other fixed rate securities 3,625 261 0 3,886
Loans guaranteed by mortgage 1,006 4 0 1,010
Other loans 1,211 6 19 1,236
Deposits with credit institutions 3 0 0 3
Other financial investments 176 11 1 188
Interest on liquid assets and other 57 4 0 61
Indirect income shares and real estate 630 1 0 631
TOTAL 7,063 289 34 7,386
2002
Income from participations 20 0 19 39
Group companies:Income from other investments
Real estate1 112 5 2 119
Shares 167 3 0 170
Bonds and other fixed rate securities 4,034 292 0 4,326
Loans guaranteed by mortgage 1,201 5 0 1,206
Other loans 1,528 9 25 1,562
Deposits with credit institutions 7 0 0 7
Other financial investments 190 0 1 191
Interest on liquid assets and other 13 3 0 16
Indirect income shares and real estate 746 12 0 758
TOTAL 8,018 329 47 8,394
2001
Income from participations 18 0 60 78
Group companies:Income from other investments
Real estate1 122 2 2 126
Shares 176 6 0 182
Bonds and other fixed rate securities 4,394 297 0 4,691
Loans guaranteed by mortgage 1,338 4 0 1,342
Other loans 1,818 11 31 1,860
Deposits with credit institutions 11 4 0 15
Other financial investments 157 1 0 158
Interest on liquid assets and other 134 9 0 143
Indirect income shares and real estate 698 25 0 723
TOTAL 8,866 359 93 9,318
1 Of which allocated internal rent for real estate for AEGON’s own use is EUR 1 1 million (2002: EUR 14 million and 2001: EUR 17 million), based on current market conditions.
AEGON GROUP ANNUAL REPORT 2003 113
NOTES TO THE CONSOLIDATED INCOME STATEMENTSAmounts in EUR millions
23 FEES AND COMMISSIONS Non-Life Non-life technical Total
2003
Fee income from asset management 530 0 — 530
Sales commissions 438 0 — 438
Other fee and commission income 12 241 — 253
TOTAL 980 241 — 1,221
2002
Fee income from asset management 496 1 — 497
Sales commissions 172 0 — 172
Other fee and commission income 8 301 — 309
TOTAL 676 302 — 978
2001
Fee income from asset management 329 0 — 329
Sales commissions 139 1 — 140
Other fee and commission income 5 141 — 146
TOTAL 473 142 — 615
24 INCOME FROM BANKING ACTIVITIES2003 2002 2001
Bonds and other fixed rate securities 61 54 49
Loans guaranteed by mortgage 51 51 36
Other loans 40 68 83
Other investments and liquid assets 202 243 216
TOTAL 354 416 384
25 CHANGE IN TECHNICAL PROVISIONS2003 2002 2001
Technical provisions 5,055 5,179 4,804
Technical provisions with investments for account of policyholders 14,141 (9,279) (5,504)
19,196 (4,100) (700)
Investment income for account of policyholders (12,858) 11,524 9,515
CHANGE IN TECHNICAL PROVISIONS 6,338 7,424 8,815
26 PROFIT SHARING AND REBATES2003 2002 2001
Amortization of interest rate rebates 72 84 102
Surplus interest bonuses 28 38 40
Profit appropriated to policyholders 71 67 106
TOTAL 171 189 248
Granted interest rate rebates amount to EUR 38 million (2002: EUR 50 million and 2001: EUR 94 million), entirely relating to the Dutch companies.
AEGON GROUP ANNUAL REPORT 2003 114
27 OPERATING EXPENSES Non-Life Non-life technical Total
Amortization of deferred policy acquisition costs 1,728 1,848 1,422
Commissions and profit sharing from reinsurers (381) (391) (462)
COMMISSIONS AND EXPENSES 5,387 5,212 4,574
AEGON GROUP ANNUAL REPORT 2003 115
NOTES TO THE CONSOLIDATED INCOME STATEMENTSAmounts in EUR millions
Expenses include allocated internal rent related to real estate for AEGON’s own use of EUR 1 1 million (2002: EUR 14 million and 2001:EUR 17 million), based on current market conditions.Claims processing costs are included in benefits and surrenders respectively in claims for own account; investment expenses areincluded in investment charges.
The liabilities related to the various stock appreciation right plans are valued at market value and included in other payables. Thevalue was estimated using the binomial option pricing model, taking into account the period of time until the vesting date, the remainingperiod of time until maturity and the expected decreasing number of entitled employees. At the balance sheet date, market value of the2003 and 2002 plans amounted to EUR 20 million (2002: nil). The change in market value is recognized in other expenses and amountedto EUR 20 million for 2003 (2002 and 2001: nil).
AEGON has non-contributory defined benefit plans and defined contribution plans covering substantially all AEGON employees. In anumber of countries, including the Netherlands and the United Kingdom, retirement benefits are insured with our life insurancecompanies based on the appropriate actuarial formulas and assumptions. In the remaining countries, including the United States, theprovisions for pension obligations are vested in separate legal entities, not forming part of AEGON.In the United States US GAAP (SFAS 87) is applied for the US pension plans. SFAS calculations require several assumptions, includingfuture performance of financial markets, future composition of work force and best estimates of long-term actuarial assumptions. Thepension expense in the income statement in a certain year under SFAS 87 includes the expected return on assets. The expected returnon assets is calculated by applying the long-term return on a five year moving average of the market value of the plan assets. In a periodof market declines, such as recently experienced, this moving average is higher than the market value of the assets at the reportingdate. The difference between the expected return reflected in the income statements and the actual return on the assets in a certainyear is deferred. Deferred gains or losses are amortized to the income statement applying a corridor approach. The corridor is definedas 10% of the greater of the moving average value of the plan assets or the projected benefit obligation. To the extent that the prepaidpension costs at the beginning of the year exceed the moving average asset value less the pension benefit obligation by more than the10% corridor, the excess is amortized over the employees’ average future years of service (approximately seven years). The amount innote 10 (page 94) for Prepaid pension costs on employee pension plans relates entirely to AEGON in the United States. The amount is acombination of unrecognized net losses, unrecognized prior service costs and the positive difference between the market value of thepension plan assets at the reporting date and the projected benefit obligation. In the Netherlands employees participate in a defined benefit scheme based on average salary and for the amount exceeding a certainlevel employees may opt for a defined contribution scheme. Indexation of vested rights are fully funded yearly and immediately chargedto the income statements.In the United Kingdom, AEGON UK has a defined benefit scheme which covers the great majority of employees. With effect from April 1,2003, this fund was closed to new entrants who are now placed in a defined contribution scheme. In addition, current employees in thedefined benefit scheme will either have future benefit entitlements reduced or will have to pay 5% of salary to maintain benefits atcurrent level. Employer contributions at the rate of 14% commenced with effect from January 1, 2003.In the other countries pension costs are fully charged to the income statements in the years in which they are earned by the employees.
The average number of employees was 28,521 of which 5,136 agent-employees (2002: 25,903 of which 3,985 agent-employees and2001: 25,790 of which 4,298 agent-employees). The specification per geographical area is as follows:
2003 2002 2001
Americas 14,921 15,628 16,007
The Netherlands 6,016 2,986 3,073
United Kingdom 5,130 4,942 4,574
Other Countries 2,454 2,347 2,136
TOTAL 28,521 25,903 25,790
The average number of employees of joint ventures have been included proportionally. The total number employed at these jointventures was 333 (2002: 49 and 2001: 931). The 2002 figures have been adjusted for self-employed agents which are no longer included.The increase in the average number of employees in the Netherlands is due to the consolidation of the Meeùs group and otherdistribution companies.
AEGON GROUP ANNUAL REPORT 2003 116
REMUNERATION EXECUTIVE BOARD AND SUPERVISORY BOARD
REMUNERATION OF ACTIVE AND RETIRED MEMBERS OF THE EXECUTIVE BOARD PerformanceAmounts in EUR thousands related
Salary payments2 Pension Total
2003
D.J. Shepard 8841 1,2073 229 2,320
J.B.M. Streppel 6524 0 221 873
J.G. van der Werf 5524 0 187 739
A.R. Wynaendts (as of April 17, 2003) 380 0 129 509
TOTAL FOR ACTIVE MEMBERS 2,468 1,207 766 4,441
P. van de Geijn (up to October 31, 2003) 420 0 143 563
TOTAL 2,888 1,207 909 5,004
2002
D.J . Shepard 1,0561 992 287 2,335
P. van de Geijn 495 215 49 759
J.B.M. Streppel 495 215 49 759
J.G. van der Werf (as of April 18, 2002) 364 — 36 400
TOTAL FOR ACTIVE MEMBERS 2,410 1,422 421 4,253
K.J. Storm (up to June 30, 2002) 328 291 1,500 2,119
TOTAL 2,738 1,713 1,921 6,372
2001
D.J. Shepard 1,1171 1,321 313 2,751
P. van de Geijn 475 457 47 979
K.J. Storm 642 616 64 1,322
J.B.M. Streppel 475 305 47 827
TOTAL FOR ACTIVE MEMBERS 2,709 2,699 471 5,879
H.B. van Wijk — 188 — 188
TOTAL 2,709 2,887 471 6,067
1 D.J. Shepard earns a salary of USD 1 million.2 Under an annual short term incentive plan D.J. Shepard may receive USD 50,000 per percent point increase in the preceding year’s earnings per share. The other members of the
Executive Board may receive EUR 31,765 (over 2002) per percent point increase in the preceding year’s earnings per share in excess of the rate of European inflation as indicatedby the European Central Bank. All bonuses have a maximum of 150% of that year’s salary. No bonuses were paid in 2003 relating to 2002.
3 In addition to the short term incentive plan, D.J. Shepard earned a performance allowance for the period until April 18, 2002 related to the earnings increase of AEGON USA in2002 which was paid in 2003. As of April 18, 2002, Mr. Shepard is entitled to an annual incentive equal to 0.1% of the net income of AEGON N.V., for the first time for thefinancial year 2002, paid in 2003 as well.
4 Base salary including increase from Dutch collective labour agreement and a tax deferred employee savings scheme.
For a detailed description of the remuneration policy regarding the members of the Executive Board refer to page 71 and following.In line with current market practice the members of the Executive Board are under circumstances entitled to certain severance
payments. These payments are either based on age and years of employment with AEGON or fixed to an amount not exceeding threeyears’ remuneration upon termination of the employment agreement under certain specific circumstances, such as a change of control, a fundamental change in policy or early retirement upon reaching the age of 60.
AEGON GROUP ANNUAL REPORT 2003 117
NOTES TO THE CONSOLIDATED INCOME STATEMENTSAmounts in EUR millions
REMUNERATION OF ACTIVE AND RETIRED MEMBERS OF THE SUPERVISORY BOARDIn EUR 2003 2002 2001
M. Tabaksblat 56,722 56,722 56,722
H. de Ruiter 45,378 45,378 45,378
D.G. Eustace 48,214 45,378 45,378
O.J. Olcay 34,034 34,034 34,034
K.M.H. Peijs — 34,034 34,034
G.A. Posthumus — 45,378 39,705
T. Rembe 48,214 36,870 34,034
W.F.C. Stevens 39,706 34,034 34,034
K.J. Storm (as of July 1, 2002) 34,034 17,017 —
F.J. de Wit 34,034 34,034 34,034
L.M. van Wijk (as of April 17, 2003) 21,205 — —
TOTAL FOR ACTIVE MEMBERS 361,541 382,879 357,353
Sir Michael Jenkins — — 34,034
J.F.M. Peters (up to May 3, 2001) — — 15,808
K.M.H. Peijs (up to May 27, 2003) 13,875 — —
G.A. Posthumus (up to April 17, 2003) 15,882 — —
TOTAL 391,298 382,879 407,195
The remuneration of members of the Supervisory Board is related to the functions of the individual member within the SupervisoryBoard. The chairman and the vice-chairman, as well as the members of the Audit Committee, are entitled to certain additional paymentsas reflected in the table above.
STOCK OPTIONS INCLUDING STOCK APPRECIATION RIGHTS AND INTERESTS IN AEGON HELD BYACTIVE MEMBERS OF THE EXECUTIVE BOARD
Stock Stock Sharesoptions Exercise Exercise Market options Exercise held in
Balance at price price price Balance at price AEGON atJanuary 1 EUR Granted EUR Lapsed Date EUR December 31 EUR December 31
D.J. Shepard 200,000 29.02 200,000 — — — —
200,000 46.95 0 — — 200,000 46.95
200,000 34.50 0 — — 200,000 34.50
100,000 34.84 0 — — 100,000 34.84
50,0001 26.70 0 — — 50,0001 26.70 287,216
J.B.M. Streppel 50,000 29.02 50,000 — — — —
40,0001 46.95 0 — — 40,0001 46.95
40,000 34.50 0 — — 40,000 34.50
100,000 34.84 0 — — 100,000 34.84
50,0001 26.70 0 — — 50,0001 26.70 —
J.G. van der Werf 60,000 29.02 60,000 — — — —
48,000 46.95 0 — — 48,000 46.95
48,000 34.50 0 — — 48,000 34.50
50,000 34.84 0 — — 50,000 34.84
50,0001 26.70 0 — — 50,0001 26.70 121,599
A.R. Wynaendts 36,0001 46.95 0 — — 36,0001 46.95
20,0001 34.50 0 — — 20,0001 34.50
16,000 34.50 0 — — 16,000 34.50
20,0001 34.84 0 — — 20,0001 34.84
15,000 34.84 0 — — 15,000 34.84
40,0001 26.70 0 — — 40,0001 26.70
50,0001,2 6.30 0 — — 50,0001 6.30 —
1 Stock appreciation rights. For a description refer to page 138.2 The stock appreciation rights were granted before becoming a member of the Executive Board.
AEGON GROUP ANNUAL REPORT 2003 118
The criteria for the number of stock appreciation rights or stock option rights to be offered to the members of the Executive Board areas follows:1. Comparison of the AEGON share price with the share prices of a peer group of nine financial companies (ABN Amro, AIG, Allianz,
AXA, Fortis, Generali, ING, Prudential PLC, and Zurich). The comparison is based on the share price performance over the precedingthree years.
2. If the AEGON share price achieves a top three position, each Executive Board member will receive 200,000 rights, if it ranks in thebottom group (three companies) 50,000 rights will be granted and if it finishes in the middle group (of four companies) eachExecutive Board member will earn 100,000 rights.
3. If there is no increase in earnings per share, no options will be granted.
At the balance sheet date, J.B.M. Streppel had a 5% mortgage loan of EUR 680,700, and A.R. Wynaendts had two mortgage loans,totaling EUR 635,292 with interest rates of 3.9% and 4.1% respectively.In accordance with the terms of these contracts no principal repayments were received on these loans in 2003. The terms of these loanshave not been amended.
Addition to provision for doubtful debts 766 32 6 804
Currency exchange rate differences 1 0 (18) (17)
Book gain on sale of partnership interests in Mexico (343) — — (343)
Other income and expenditure (9) 4 (61) (66)
TOTAL 415 36 (73) 378
30 INVESTMENT INCOME ALLOCATED TO THE NON-TECHNICAL ACCOUNT
Income on investments held against shareholders’ equity does not form a part of the technical results. The amounts transferred to thenon-technical account include the direct yield on allocated investments or are based on the average direct yield of the investmentportfolio.
31 CORPORATION TAX
The tax burden for AEGON as a group is made up of the direct and future taxes payable on profits of the units operating in the variouscountries. The effective tax rate for 2003 was 27% compared to 19% for 2002. The low effective tax rate in 2002 was largely due to areduction of the deferred tax liability, favorable adjustments resulting from the filing of the 2001 corporate tax returns in the UnitedStates, lower taxable income relative to tax preferred investments and tax-exempt income in the Netherlands and the United States, andthe use of tax losses in the United Kingdom.
2003 2002 2001
Breakdown:Taxes currently due 646 583 709
Taxes deferred due to temporary differences (74) (230) 209
TOTAL 572 353 918
The following is a reconciliation of the nominal tax charge to the actual tax expense:Statutory tax rate 731 621 1,109
Increases (decreases) in taxes resulting from:— dividend income exclusions and credits (157) (181) (286)
— depreciation of equipment and real estate (2) (2) (3)
— valuation of technical provisions 0 0 2
— other, net 0 (85) 96
ACTUAL TAX EXPENSE 572 353 918
Amounts paid in cash in 2003 for income taxes totaled EUR 365 million (2002: EUR 31 1 million and 2001: EUR 930 million).
AEGON GROUP ANNUAL REPORT 2003 120
32 NET INCOME UNCONSOLIDATED GROUP COMPANIES
TRANSAMERICA NON-INSURANCE BUSINESSES
Transamerica Finance Corporation (TFC) conducts business in commercial lending, intermodal leasing and real estate informationservices operations. Due to their dissimilarity in operations in relation to the operations of AEGON, these group companies have notbeen consolidated.
The commercial lending operation makes commercial loans through four businesses: distribution finance, business capital, equipmentfinancial services and specialty finance. It has offices in the United States, Mexico, Canada, Europe and India. The intermodal leasingoperation provides service, rentals and term operating leases through a worldwide network of offices, third party depots and otherfacilities. The intermodal leasing operation offers a wide variety of equipment used in international and domestic commerce around theworld. Its fleet consists of over 637,000 marine containers (consisting of units that are either owned or managed for and leased fromothers) and over 18,000 European trailers. Real estate information services provides property tax payment and reporting, floodcertification and other real estate information services to its customers.
On August 5, 2003 AEGON announced an agreement to sell most of the commercial lending business of TFC to GE CommercialFinance. The sale price of approximately USD 5.4 billion resulted in an after-tax book gain of around USD 200 million. On January 14,2004, the transaction was closed and the book gain will be added directly to shareholders’ equity in 2004. Therefore the 2003 annualaccounts fully include on a non-consolidated basis the assets, liabilities and results for these businesses.
On October 2, 2003, AEGON completed the sale of TFC’s real estate tax services and flood hazard certification businesses to TheFirst American Corporation for a total cash sale price of EUR 354 million (USD 400 million). As part of the transaction, TFC’s real estatetax service subsidiary has distributed assets valued at EUR 217 million (USD 246 million) to TFC. The sale of the two TFC subsidiaries,combined with the asset distribution transaction, resulted in an after-tax book gain of EUR 307 million (USD 347 million), which wasadded directly to AEGON shareholders’ equity against the invested capital charged earlier to equity as goodwill. In 2003, these units hadcontributed EUR 75 million, USD 85 million (2002: EUR 42 million, USD 40 million) to AEGON’s net income before funding costs on therelated raised debt.
The remaining businesses of TFC will primarily consist of maritime container and European trailer leasing, which will be consolidatedas of the first quarter 2004.
Following are the consolidated balance sheets, consolidated income statements and notes thereto of Transamerica FinanceCorporation, established in Delaware and operating from Chicago, Illinois, USA. In addition, the statements include allocated expensesand financing costs from associated non-insurance companies. The statements have been prepared in accordance with Dutch accountingprinciples.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 OF TRANSAMERICA FINANCE CORPORATION
2003 2002
Cash 57 62
Finance receivables 4,906 5,728
Equipment 85 97
Other assets 1,652 2,308
TOTAL ASSETS 6,700 8,195
Long-term borrowings 2,472 3,551
Short-term borrowings 2,256 2,220
Other liabilities 781 872
Accruals and deferred income 0 285
Provisions for deferred taxation 507 394
Shareholders’ equity 684 873
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 6,700 8,195
AEGON GROUP ANNUAL REPORT 2003 121
NOTES TO THE CONSOLIDATED INCOME STATEMENTSAmounts in EUR millions
CONSOLIDATED INCOME STATEMENTS OF TRANSAMERICA FINANCE CORPORATION
2003 2002 2001
Finance charges 524 672 919
Leasing revenues 369 444 489
Real estate information 217 254 283
Other revenues 135 141 261
TOTAL REVENUES 1,245 1,511 1,952
Interest and debt expense 178 252 470
Salaries and other employee expenses 286 332 365
Depreciation on equipment held for lease 177 222 246
Addition to the provision for doubtful accounts (1) 169 155
Miscellaneous income and expenditure 272 414 590
TOTAL EXPENSES 912 1,389 1,826
Income before tax 333 122 126
Corporation tax (91) (34) (1)
NET INCOME FROM OPERATIONS 242 88 125
The low corporation tax in 2001 was caused by the reversal of state tax liabilities that were no longer needed.
Income reported by AEGON:Net income reported 242 88 125
Funding costs on the related raised debt, net of tax (24) (37) (53)
NET INCOME REPORTED BY AEGON 218 51 72
CASH FLOW FOR TRANSAMERICA FINANCE CORPORATION:
Net cash provided by operating activities 700 547 465
Net cash provided by investing activities 135 914 2,285
Net cash used in financing activities (840) (1,463) (2,737)
NOTES TO THE CONSOLIDATED BALANCE SHEETS OF TRANSAMERICA FINANCE CORPORATION
Where not otherwise stated, balance sheet items are carried at face value. If necessary a provision for bad and doubtful debts has been deducted.
CASH
All cash is at free disposal.
2003 2002
FINANCE RECEIVABLES
The contractual maturity is:Less than three months 1,350 1,230
Between three months and one year 1,388 1,453
Between one and five years 1,660 2,416
Over five years 508 629
TOTAL 4,906 5,728
This item includes receivables from lending and leasing activities after deduction of unearned finance charges.
2003 2002
Net finance receivables 5,018 5,901
Less allowances for losses (112) (173)
TOTAL 4,906 5,728
AEGON GROUP ANNUAL REPORT 2003 122
Transamerica Finance Corporation has entered into securitization arrangements under which it sells designated pools of net financereceivables to qualified special purpose entities (QSPEs). Under the terms of the securitization arrangements, TFC retains the servicingof the securitized assets and generally receives a servicing fee on the outstanding balance of the securitized assets along with rights tofuture residual cash flows.
Transamerica Finance Corporation maintains a provision for losses on net finance receivables at an amount that it believes issufficient to provide adequate protection against losses in its loan portfolios. The allowance is provided through charges against currentincome and is adjusted for specific accounts as well as losses inherent in the portfolio.
Transamerica Finance Corporation determines its allowance for losses by taking into account expected losses in each business, theratio of the provision for losses to net finance receivables outstanding and the ratio of net credit losses to average net financereceivables outstanding. A specific provision is established for impaired receivables when it is deemed probable that not all futureprincipal and interest payments will be collected in accordance with the applicable contractual terms. This provision is reviewed andupdated quarterly.
2003 2002
EQUIPMENT
Balance at January 1 97 129
Investments 5 29
Depreciation (5) (10)
Disposals and other changes 4 (12)
Currency exchange rate differences (16) (39)
BALANCE AT DECEMBER 31 85 97
Accumulated depreciation 51 87
Total cost of equipment 136 184
Equipment is shown at cost less depreciation over the estimated useful life.
2003 2002
OTHER ASSETS
Equipment held for lease 1,220 1,551
Assets held for sale 22 113
Other 410 644
TOTAL 1,652 2,308
Equipment held for lease is shown at cost less depreciation over the estimated useful life. Assets held for sale consists primarily of retailfinance receivables, certain off-lease equipment and repossessed assets.
2003 2002
LONG-TERM BORROWINGS
The contractual maturity is:Less than three months 371 218
Between three months and one year 437 318
Between one and five years 1,494 2,478
Over five years 170 537
TOTAL 2,472 3,551
Long-term borrowings include intercompany loans for an amount of EUR 1,989 million (2002: EUR 2,342 million).The weighted average interest rate on long-term borrowings at December 31, 2003, and 2002 was 4.2% and 6.32% respectively.
AEGON GROUP ANNUAL REPORT 2003 123
NOTES TO THE CONSOLIDATED INCOME STATEMENTSAmounts in EUR millions
2003 2002
SHORT-TERM BORROWINGS
Commercial paper 2,256 2,144
Banks 0 76
TOTAL 2,256 2,220
The weighted average interest rates on short-term borrowings at December 31, 2003, and 2002 were 1.72% and 1.94% respectively.
2003 2002
OTHER LIABILITIES
Creditors 413 489
Taxes 92 (3)
Other liabilities 276 386
TOTAL 781 872
2003 2002
SHAREHOLDERS’ EQUITY
Capital 11 14
Reserves 673 859
TOTAL 684 873
2003 2002
RESERVES
Balance at January 1 859 1,256
Net income 218 51
Capital redemptions / contributions 10 (161)
Dividends paid (542) (59)
Currency exchange rate differences (133) (163)
Other changes 261 (65)
BALANCE AT DECEMBER 31 673 859
Other changes in 2003 include the book gain from the sale of the real estate tax services and flood hazard certification businesses.
COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Transamerica Finance Corporation grants various credit related commitments to meet the financingneeds of its customers. Such commitments include purchase obligations and partnership investment commitments, revolving lines ofcredit and financial guarantees, including guarantees of letters of credit and standby letters of credit. Commitments under sucharrangements totaled EUR 1,547 million at December 31, 2003. Transamerica Finance Corporation also is party to various other financialguarantees that could require payment of certain obligations in the event of demand by third parties. These guarantees amounted toEUR 20 million at December 31, 2003.
AEGON GROUP ANNUAL REPORT 2003 124
NOTES TO THE CONSOLIDATED INCOME STATEMENTS OF TRANSAMERICA FINANCE CORPORATION
REVENUE RECOGNITION
Finance charges are generally recognized on an effective yield method. Charges collected in advance on distribution finance receivablesare taken into income on a straight-line basis over the periods to which the charges relate, which generally average ninety days. Relatedorigination and other non-refundable fees and direct origination costs are deferred and amortized as adjustments of finance chargesover the contractual life of the transactions. Accrual of finance charges is suspended on accounts that contractually become past due inexcess of ninety days or at the discretion of management.
Leasing revenues are earned on service, rental and term operating leases. Rental revenues are recognized in the period billed.Revenues from service contract minimum and term leases are recognized on a straight-line basis over the lease term. Initial direct costsare amortized on a straight-line basis over the lease term.
Real estate service revenues are primarily fees for life of loan property tax payment and reporting services and flood certifications.Life of loan service fees are deferred and recognized in income over the expected service period. Transamerica Finance Corporationperiodically reviews its revenue recognition method to determine the expected life of a contract and/or whether prepayment speeds usedhave changed. Accordingly, TFC may adjust the deferral period to reflect current trends.
2003 2002 2001
BREAKDOWN OF NET INCOME FROM OPERATIONS BY SEGMENT
Commercial lending 217 94 87
Leasing 7 (9) (12)
Real estate information 75 42 42
Other (57) (39) 8
NET INCOME FROM OPERATIONS 242 88 125
2003 2002 2001
SALARIES AND OTHER EMPLOYEE COSTS
Salaries 246 261 319
Pension expenses (6) (4) (6)
Social security charges 11 14 15
Other employee costs 35 61 37
TOTAL 286 332 365
TFC employed 2,104 people at December 31, 2003 (2002: approximately 3,900 and 2001: approximately 4,700).
33 NET INCOME PER SHARE
The following table provides the information underlying the calculation of net income per share. Net income per share excludes dilutionand is computed by dividing net income available to common shareholders, which is after deduction of dividends on the preferred shares,by the weighted average number of common shares (EUR 0.12 par value) outstanding. Fully diluted net income per share is computedbased on the weighted average number of common shares outstanding during the year plus dilutive potential common shares consideredoutstanding during the year (treasury stock method). The weighted average number of common shares has been adjusted retroactivelyfor all periods presented to reflect stock dividends.
2003 2002 2001
Net income 1,793 1,547 2,397
Dividend on preferred shares (95) (30) (3)
Net income available for common shareholders 1,698 1,517 2,394
Interest on convertible debt — — —
NET INCOME USED IN CALCULATION DILUTED NET INCOME PER SHARE 1,698 1,517 2,394
Numbers in millions
Weighted average number of common shares outstanding 1,476 1,458 1,412
Dilutive effects from:— options — — 6
— convertible debt — — 1
MAXIMUM WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,476 1,458 1,419
Amounts in EUR
Net income per share 1.15 1.04 1.70
Net income per share fully diluted 1.15 1.04 1.69
AEGON GROUP ANNUAL REPORT 2003 125
SEGMENT INFORMATION — REVENUES AND PRODUCTIONAmounts in millions
2003 2002 2003 2002USD USD % EUR EUR %
REVENUES
2,006 1,694 18 Life general account single premiums 1,773 1,789 (1)
6,162 5,386 14 Life general account recurring premiums 5,448 5,689 (4)
5,593 5,900 (5) Life policyholders account single premiums 4,945 6,232 (21)
TOTAL PRODUCTION ON BALANCE SHEET 21,002 26,907 (22) 18,568 28,419 (35)
OFF BALANCE SHEET PRODUCTION
Synthetic GICs 13,242 12,196 9 11,707 12,881 (9)
Mutual funds/Collective Trusts and other managed assets 8,305 6,646 25 7,343 7,020 5
TOTAL PRODUCTION OFF BALANCE SHEET 21,547 18,842 14 19,050 19,901 (4)
1Includes also variable annuities and fee business2Of which indirect income on shares and real estate 181 316 (43) 160 334 (52)
AEGON GROUP ANNUAL REPORT 2003 127
THE NETHERLANDSAmounts in EUR millions
2003 2002 %
INCOME BY PRODUCT SEGMENT
Traditional life 548 552 (1)
Life for account of policyholders 135 49 176
Fee business 13 0
Life insurance 696 601 16
Accident and health insurance 44 26 69
General insurance 11 24 (54)
TOTAL INSURANCE 751 651 15
of which general account 603 602 0
of which policyholders account1 148 49
BANKING ACTIVITIES2 20 8 150
Income before tax 771 659 17
Corporation tax (179) (136) 32
NET INCOME 592 523 13
REVENUES
Life general account single premiums 676 507 33
Life general account recurring premiums 518 564 (8)
Life policyholders account single premiums 592 1,171 (49)
Life policyholders account recurring premiums 1,461 1,331 10
Total life insurance gross premiums 3,247 3,573 (9)
Accident and health insurance premiums 163 162 1
General insurance premiums 459 447 3
Total gross premiums 3,869 4,182 (7)
Investment income insurance activities3 1,465 1,397 5
Fees and commissions 265 57
Income from banking activities 354 416 (15)
TOTAL REVENUES 5,953 6,052 (2)
Investment income for account of policyholders 1,096 (1,165)
GROSS MARGIN, COMMISSIONS AND EXPENSES
Gross margin 1,727 1,325 30
Commissions and expenses4 956 666 44
STANDARDIZED NEW PREMIUM PRODUCTION LIFE INSURANCE
Single premiums 1,164 1,536 (24)
Recurring premiums annualized 156 191 (18)
TOTAL RECURRING PLUS 1/10 SINGLE 272 345 (21)
DEPOSITS
Savings deposits 2,899 3,386 (14)
TOTAL PRODUCTION ON BALANCE SHEET 2,899 3,386 (14)
INVESTMENT CONTRACTS 13 393 (97)
OFF BALANCE SHEET PRODUCTION
Mutual funds and other managed assets 3,522 1,223 188
TOTAL PRODUCTION OFF BALANCE SHEET 3,522 1,223 188
1Includes also fee business2Includes income on off balance sheet type products3Of which indirect income on shares and real estate 468 418 124For 2003 includes the effect of the consolidation of the distribution companies
AEGON GROUP ANNUAL REPORT 2003 128
UNITED KINGDOMAmounts in millions
2003 2002 2003 2002GBP GBP % EUR EUR %
INCOME BY PRODUCT SEGMENT
Traditional life 1 12 (92) 2 19 (89)
Life for account of policyholders 128 140 (9) 184 224 (18)
Fee business 1 (6) 2 (10)
LIFE INSURANCE 130 146 (11) 188 233 (19)
of which general account 1 12 (92) 2 19 (89)
of which policyholders account1 129 134 (4) 186 214 (13)
Income before tax 130 146 (11) 188 233 (19)
Corporation tax (37) (34) 9 (53) (55) (4)
NET INCOME 93 112 (17) 135 178 (24)
REVENUES
Life general account single premiums 189 172 10 274 273 0
Life general account recurring premiums 104 81 28 151 129 17
Life policyholders account single premiums 2,675 2,636 1 3,872 4,196 (8)
DEFERRED POLICY ACQUISITION COSTSAmounts in EUR millions
The United OtherAT DECEMBER 31, 2003 Americas Netherlands Kingdom countries Total
Traditional life 3,893 199 151 149 4,392
Fixed annuities 1,605 — — — 1,605
GICs and funding agreements 28 — — — 28
Life for account of policyholders 639 798 3,561 28 5,026
Variable annuities 1,300 — — — 1,300
Fee business 90 — 6 — 96
Accident and health 910 37 — — 947
TOTAL 8,465 1,034 3,718 177 13,394
Of which VOBA 2,745 — 1,205 — 3,950
The United OtherAT DECEMBER 31, 2002 Americas Netherlands Kingdom countries Total
Traditional life 4,788 248 149 68 5,253
Fixed annuities 1,863 — — — 1,863
GICs and funding agreements 54 — — — 54
Life for account of policyholders 741 831 3,718 29 5,319
Variable annuities 1,492 — — — 1,492
Fee business 102 — 6 — 108
Accident and health 1,073 36 — — 1,109
TOTAL 10,113 1,115 3,873 97 15,198
Of which VOBA 4,002 — 1,345 — 5,347
AEGON GROUP ANNUAL REPORT 2003 133
GROUP COMPANIES
AEGON’s most important group companies (100% unless indicated otherwise).
THE AMERICAS
AEGON USA, Inc., Cedar Rapids, (Iowa USA)Commonwealth General Corporation, Wilmington (Delaware USA)First AUSA Life Insurance Company, Baltimore (Maryland USA)Life Investors Insurance Company of America, Cedar Rapids (Iowa USA)Monumental Life Insurance Company, Baltimore (Maryland USA)Peoples Benefit Life Insurance Company, Cedar Rapids (Iowa USA)Stonebridge Casualty Insurance Company, Columbus (Ohio USA)Stonebridge Life Insurance Company, Rutland (Vermont USA)Transamerica Corporation, Wilmington (Delaware USA)Transamerica Financial Life Insurance Company, Inc., Purchase (New York USA)Transamerica Life Canada, Scarborough (Ontario Canada)Transamerica Life Insurance and Annuity Company, Charlotte (North Carolina USA)Transamerica Life Insurance Company, Cedar Rapids (Iowa USA)Transamerica Occidental Life Insurance Company, Cedar Rapids (Iowa USA)Veterans Life Insurance Company, Springfield (Illinois USA)Western Reserve Life Assurance Co. of Ohio, Columbus (Ohio USA)
THE NETHERLANDS
AEGON Bank N.V., UtrechtAEGON Financiële Diensten B.V., The HagueAEGON International N.V., The HagueAEGON Levensverzekering N.V., The HagueAEGON NabestaandenZorg N.V., GroningenAEGON Nederland N.V., The HagueAEGON Schadeverzekering N.V., The HagueAEGON Spaarkas N.V.,The HagueAEGON Vastgoed Holding B.V., The HagueMeeùs Groep B.V., AmersfoortSpaarbeleg Kas N.V., UtrechtTKP Pensioen B.V., Groningen
UNITED KINGDOM
AEGON Asset Management UK plc, LondonAEGON UK Distribution Holdings Ltd., LondonAEGON UK plc, LondonGuardian Assurance plc, Lytham St AnnesGuardian Linked Life Assurance Limited, Lytham St AnnesGuardian Pensions Management Limited, Lytham St AnnesHS Administrative Services Limited, ChesterScottish Equitable International Holdings plc, LondonScottish Equitable plc, Edinburgh
OTHER COUNTRIES
ÁB-AEGON Általános Biztosító Rt., Budapest (Hungary)AEGON España S.A., Madrid (Spain) (99.98%)AEGON Lebensversicherungs-AG, Düsseldorf (Germany)AEGON Life Insurance (Taiwan) Inc., Taipei (Taiwan)
The legally required list of participations as set forth in articles 379 and 414 of Book 2 of the Dutch Civil Code has been registered withthe Trade Register in The Hague.
AEGON GROUP ANNUAL REPORT 2003 134
BALANCE SHEETS OF AEGON N.V. AT DECEMBER 31Amounts in EUR millions
1 Excluding dividend on preferred shares of EUR 30 million.
For notes: see page 137 and following.
AEGON GROUP ANNUAL REPORT 2003 135
INCOME STATEMENTS OF AEGON N.V.Amounts in EUR millions
2003 2002 2001
Net income group companies 1,811 1,511 2,337
Other income (18) 36 60
NET INCOME 1,793 1,547 2,397
AEGON GROUP ANNUAL REPORT 2003 136
ACCOUNTING PRINCIPLES
Unless otherwise stated, balance sheet items are valued in accordance with the accounting principles described in the notes to theconsolidated balance sheets.
1 SHARES IN GROUP COMPANIES2003 2002
Balance at January 1 12,464 11,850
Capital contribution and acquisitions — 3,756
Divestitures (119) (1,149)
Net income for the financial year 1,811 1,511
Revaluations (1,904) (3,504)
BALANCE AT DECEMBER 31 12,252 12,464
The group companies are stated at their net asset value.
2 LOANS TO GROUP COMPANIES 2003 2002
Balance at January 1 5,361 6,490
Additional loans 1,439 941
Repayments or payments received (1,039) (1,019)
Other changes (1,029) (1,051)
BALANCE AT DECEMBER 31 4,732 5,361
3 OTHER LOANS2003 2002
Balance at January 1 352 435
Repayments or payments received (151) (83)
BALANCE AT DECEMBER 31 201 352
4 SHARE CAPITALCommon Preferred Preferred
shares shares A shares B Total
Authorized 360 125 125 610
Unissued 178 72 122 372
ISSUED AND OUTSTANDING 182 53 3 238
Vereniging AEGON, based in The Hague, holds all of the issued preferred shares.AEGON N.V. and Vereniging AEGON have amended the option arrangements under the 1983 Merger Agreement. Under the amended
option arrangements Vereniging AEGON, in case of an issuance of new shares by AEGON N.V., has the right to have issued to it as manyclass B preferred shares as shall enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of total votingshares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. On September 19,2003, and December 29, 2003, Vereniging AEGON exercised its option rights following the dilution caused by the stock dividendissuances of AEGON N.V. and acquired 10,220,000 respectively 880,000 class B preferred shares at par value to correct this dilution.
AEGON N.V. and Vereniging AEGON have entered into a preferred shares voting rights agreement, pursuant to which VerenigingAEGON has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead, Vereniging AEGON has agreedto exercise one vote only per preferred share, except in the event of a ’special cause’, such as the acquisition of a 15% interest inAEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons whetherindividually or as a group, other than in a transaction approved by the Executive Board and Supervisory Board. If, in its sole discretion,Vereniging AEGON determines that a ’special cause’ has occurred, Vereniging AEGON will notify the General Meeting of Shareholders andretain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
In both 2001 and 2002 AEGON N.V. entered into Total Return Swaps (TRSs) with Vereniging AEGON in order to hedge the stockoption plan for the respective years. The TRSs give AEGON N.V. the right to the capital gains on AEGON N.V. shares (1 1.3 million for the2001 TRS and 7.8 million for the 2002 TRS) at the termination date and to the dividends on these shares during the contract period. Thecapital gains are calculated based on an exercise price of EUR 32.04 for the 2001 TRS and EUR 26.70 for the 2002 TRS. Any lossescompared to the exercise price will be paid by AEGON N.V. to Vereniging AEGON upon termination. AEGON N.V. in return will pay interest
AEGON GROUP ANNUAL REPORT 2003 137
NOTES TO THE BALANCE SHEETS OF AEGON N.V.Amounts in EUR millions
NOTES TO THE BALANCE SHEETS OF AEGON N.V.Amounts in EUR millions
to Vereniging AEGON on a quarterly basis over the (remaining) amount outstanding under the TRSs. The interest rate is equal to the3 month EURIBOR plus a spread. The 2001 TRS ends on March 12, 2006, and the 2002 TRS matures on March 1 1, 2009, but both swaps may be terminated earlier, eitherpartly or entirely, at the option of AEGON N.V. The TRSs are carried at market value with changes in market value reported in equity.
In 2002 Vereniging AEGON and AEGON N.V. agreed to mark to market the existing TRS agreements that hedge the 2001 and 2002stock option and stock appreciation rights (SARs) plans based on the EUR 10.04 closing price of AEGON N.V. shares on EuronextAmsterdam at September 17, 2002. This resulted in a payment to Vereniging AEGON of EUR 378.3 million.
2003 2002
NUMBER OF COMMON SHARES
Balance at January 1 1,444,579,122 1,422,253,234
Issuance of shares — —
Stock dividend 69,798,678 22,325,888
Exercise of options — —
BALANCE AT DECEMBER 31 1,514,377,800 1,444,579,122
The weighted average number of EUR 0.12 common shares over 2003 was 1,476,499,310 (2002: 1,457,614,959).The shares repurchased by AEGON, although included in the issued and outstanding number of shares, are excluded from the calculationof the weighted average number of shares (see page 140). The number has been adjusted for stock dividend.
STOCK APPRECIATION RIGHTS AND STOCK OPTIONS
Senior executives of AEGON companies as well as other AEGON employees have been offered AEGON SARs in 2003 and 2002 which donot entitle the holder to buy AEGON shares but provide the same financial benefits. Stock options have been offered in 2001 andprevious years. Rights and options have been granted at an exercise price equal to the market price of the shares at the date of thegrant. The rights granted in 2003 and 2002 vest after two years and can only be exercised during the five years after the vesting date.The plans for 1997 up to and including 2001 can be exercised three years after being granted and then during a period of two years.Plans for SARs and, in the past, stock option plans can only be established after the prior consent of the annual General Meeting ofShareholders. If, subsequently, the Executive Board decides to implement such plans, that decision has to be approved by theSupervisory Board. Options granted pursuant to the purchase agreement with Providian have various expiration dates. The optionsgranted in 1997 to senior executives of former Providian business units fully vest in three years and the exercise period is up to tenyears, with the latest period ending in August 2008.In compliance with regulations, SARs and options cannot be exercised in black-out periods.
The following tables set forth the changes in the years 2001, 2002 and 2003 as well as the breakdown of SARs and optionsoutstanding.
Weightedaverageexercise
Number of price1
options/SARs in EUR
Balance at January 1, 2001 41,926,284 30.22
Issued 11,288,800 34.84
Exercised (3,920,532) 12.46
Lapsed (25,374) 49.54
Balance at December 31, 2001 49,269,178 32.69
Issued 11,555,700 26.70
Exercised (883,376) 16.36
Lapsed (5,004,000) 17.31
Balance at December 31, 2002 54,937,502 34.98
Issued 11,447,300 6.30
Exercised (26,840) 10.14
Lapsed (10,690,852) 28.55
BALANCE AT DECEMBER 31, 2003 55,667,110 37.38
1 Adjusted for the stock splits in 1998 and 2000 as appropiate.
AEGON GROUP ANNUAL REPORT 2003 138
Outstanding ExerciseOriginal January 1, December 31, price
Options/SARs number1 20031 20031 in EUR1 Exercise period3
1997 9,479,500 344,500 — 17.36 until January 1, 2004
Providian 7,204,384 1,186,402 1,099,710 17.852 until August 6, 2008
1998 11,518,000 11,027,500 741,000 29.02 until May 23, 2004
19994 8,925,300 8,924,900 8,924,900 46.95 until March 6, 2004
20004 10,609,700 10,609,700 10,609,700 34.50 until March 14, 2005
20014 11,288,800 11,288,800 11,288,800 34.84 until March 13, 2006
20025 11,555,700 11,555,700 11,555,700 26.70 until March 12, 2009
20035 11,447,300 11,447,300 6.30 until March 11, 2010
82,028,684 54,937,502 55,667,110
1 Adjusted for the stock splits in 1998 and 2000 as appropriate.2 Weighted average exercise price of the outstanding options in USD calculated at the closing rate.3 Up to and including the 1999 series the exercise period for a small part of the options is 74 months.4 Including stock appreciation rights, which do not entitle the holder to buy AEGON shares but provide the same financial benefits.5 Stock appreciation rights, which do not entitle the holder to buy AEGON shares but provide the same financial benefits; only employees in Canada were granted
stock options: 438,200 (2002: 263,100).
Stock options exercisable as of December 31, 2003, amount to 18,070,310 (2002: 20,395,702 and 2001: 18,445,778) and their weightedaverage exercise price amounts to EUR 38.66 (2002: EUR 35.24 and 2001: EUR 24.75).
The market value of the SARs and stock options granted during the year amounts to EUR 20 million at the grant date (2002: EUR 76million and 2001: EUR 83 million). This value was estimated using the binomial option pricing model, taking into account that the SARsand options granted during 2003 and 2002 vest after two years and the options granted in 2001 cannot be exercised within the firstthree years. The liabilities related to SARs and options are valued at market value. The change in value of the liabilities is recognized inthe income statement under expenses.
The breakdown of the SARs and stock options granted in 2003 is as follows: Executive Board nil, other senior executives 4,350,500and other employees 7,096,800 (2002: 150,000, 4,041,000 and 7,364,700 and 2001: 400,000, 3,824,700 and 7,064,100 respectively).For detailed information about the Executive Board’s SARs and options, refer to page 1 18.
5 SURPLUS FUNDSPaid-in Revaluation Other Total Totalsurplus account surplus fund 2003 2002
Balance at January 1 7,125 2,598 2,765 12,488 13,305
Net income 2002/2001 excluding preferred dividend 1,517 1,517 2,394
Final dividend and interim dividend (147) (147) (731)
Paid-in on preferred shares — 2,053
Repurchased and sold own shares 19 19 0
Valuation equity swap (5) (5) (318)
Stock dividend (9) (9) (2)
Revaluation group companies:Goodwill (358) (358) (70)
BALANCE AT DECEMBER 31 7,116 2,674 2,311 12,101 12,488
The minimum amount of the revaluation account for the consolidated investments as required by law amounts to EUR 1,393 million (2002: EUR 542 million).The legal reserve for currency differences on foreign subsidiaries refers to accumulated translation differences amounting to EUR (1,579) million (2002: EUR 166 million) and is included in the other surplus fund.
AEGON GROUP ANNUAL REPORT 2003 139
NOTES TO THE BALANCE SHEETS OF AEGON N.V.Amounts in EUR millions
Shares Real estate Total2003 2002 2003 2002 2003 2002
CONSOLIDATED REVALUATION ACCOUNT SHARES AND REAL ESTATE
Balance of revaluations at January 1 2,040 4,105 558 535 2,598 4,640
Unrealized gains and losses on shares and real estate 575 (1,572) 104 12 679 (1,560)
Unrealized gains and losses in previous years on shares and real estate sold in the reporting year 249 1,415 22 (78) 271 1,337
Realized gains and losses on shares and real estate (249) (1,421) (21) 78 (270) (1,343)
Transfer to the income statements of indirect income on shares and real estate (573) (707) (58) (51) (631) (758)
Changes in the provision for deferred taxation 23 304 (6) 19 17 323
Other changes 28 (84) (18) 43 10 (41)
BALANCE AT DECEMBER 31 2,093 2,040 581 558 2,674 2,598
Unrealized gains and losses on investments are due to changes in stock exchange quotations and reappraisal of real estate of allactivities.
The indirect income is released from this revaluation account if and as far as each of the individual balances for shares and realestate are positive. Impairments of shares are charged to the realized part of the revaluation account. At December 31, 2003, theminimum reserves as required by law include EUR 876 million for shares and EUR 517 million for real estate. In 2004, these amounts willbe kept in the revaluation account. The realized portion, amounting to EUR 1,281 million, will be transferred to the other surplus fund atJanuary 1, 2004.
OTHER SURPLUS FUND
By virtue of acquisitions in accordance with article 98, paragraph 5 of Book 2 of the Dutch Civil Code, on the balance sheet date AEGONkept 27,429,342 of its own common shares with a face value of EUR 0.12 each. The shares have been purchased to hedge stockappreciation rights and stock options granted to executives and employees.
Movements in the numbers of repurchased own shares were as follows:
Balance at January 1 30,918,580
Purchase: 1 transaction on May 13, 2003, price EUR 9.72 6,878,962
Sale: 26 transactions, average price EUR 8.28 (10,368,200)
BALANCE AT DECEMBER 31 27,429,342
The purchase and sale value of the related shares have been deducted from respectively added to the other surplus fund.Goodwill is the difference between acquisition price and net asset value, based on AEGON accounting principles. The calculated
amount is charged to shareholders’ equity in the year of acquisition or at first time consolidation.
6 LONG-TERM LIABILITIES2003 2002
Remaining terms up to 3 years 854 1,215
Remaining terms 4-5 years 893 7
Remaining terms over 5 years 961 396
TOTAL LONG-TERM LIABILITIES 2,708 1,618
Redemptions due in 2004/2003 565 521
Redemptions are included in long-term liabilities.The repayment periods of borrowings vary from in excess of one year up to a maximum of 27 years. The interest rates vary from
1.49% to 9.00% per annum.The market value of the long-term liabilities amounts to EUR 2,896 million (2002: EUR 1,552 million).
AEGON GROUP ANNUAL REPORT 2003 140
COMMITMENTS AND CONTINGENCIES
AEGON N.V. has guaranteed and is severally liable for the following:Due and punctual payment of payables due under Letter of Credit Agreements applied for by AEGON N.V. as co-applicant with
its subsidiary companies AEGON USA, Inc., Commonwealth General Corporation and Transamerica Corporation (EUR 1,8 billion). At December 31, 2003, the amount due and payable was nil.
Due and punctual payment of payables by the consolidated group companies AEGON Funding Corp., AEGON Funding Corp. II andTransamerica Corporation with respect to bonds, capital trust pass-through securities and notes issued under commercial paperprograms (EUR 5,031 million).
Due and punctual payment of payables by the non-consolidated group company Transamerica Finance Corporation with respect to:a. debt securities issued under the following three indentures: the indenture with U.S. Bank National Association (successor in interest
to Continental Illinois National Bank and Trust Company of Chicago) first dated March 15, 1981, as amended, and both indentures withBNY Midwest Trust Company (successor in interest to Harris Trust and Savings Bank) first dated July 1, 1982, and April 1, 1991,respectively, as amended (EUR 835 million); and
b. contractual obligations towards NCC Key Company as Owner Participant and U.S. Bank National Association (successor in interest toState Street Bank and Trust Company of Connecticut National Association) as Owner Trustee under a Participation Agreement datedDecember 30, 1996, (EUR 42 million).
With respect to the former subsidiary FGH BANK N.V. (sold to Hypo-Vereinsbank):a. payables due to all unsubordinated and non-privileged creditors of FGH BANK on account of deeds prior to February 27, 1987, and
loans contracted by FGH BANK after February 27, 1987, up to March 30, 1998; andb. payables due by FGH BANK under guarantees rendered or several liabilities assumed prior to February 27, 1987.The sales agreement with Hypo-Vereinsbank includes recourse against that bank for liabilities emerging from the above guarantees.
THE HAGUE, MARCH 11, 2004
SUPERVISORY BOARD EXECUTIVE BOARD
M. Tabaksblat D.J. ShepardH. de Ruiter J.B.M. StreppelD.G. Eustace J.G. van der WerfO.J. Olcay A.R. WynaendtsT. RembeW.F.C. StevensK.J. StormF.J. de WitL.M. van Wijk
AEGON GROUP ANNUAL REPORT 2003 141
OTHER INFORMATION
PROPOSAL FOR PROFIT APPROPRIATION
Appropriation of profit will be determined in accordance with the articles 31 and 32 of the Articles of Incorporation of AEGON N.V. The provisions can be summarized as follows:1. The General Meeting of Shareholders shall adopt the annual accounts.2. If the adopted profit and loss account shows a profit, the Supervisory Board may decide, upon the proposal of the Executive Board,
to set aside part of the profit to augment and/or form reserves.3. From the remaining net profit, if it is sufficient to this end, first of all the holders of preferred shares shall receive a dividend on the
amount paid-in on their preferred shares, the percentage of which, on an annual basis, shall be equal to the European Central Bank’sfixed interest percentage for basic refinancing transactions to be increased by 1.75 percentage points, all applicable to the firsttrading day on Euronext Amsterdam in the financial year to which the dividend relates. Apart from this, no other dividend is to bepaid on the preferred shares.
4. The remaining profit shall be put at the disposal of the General Meeting of Shareholders.5. The Executive Board may, subject to the approval of the Supervisory Board, make one or more interim distributions to the holders of
common shares and/or to the holders of preferred shares, the latter subject to the maximum dividend amount set forth under 3.6. A distribution on common shares may take place as a cash payment or as a payment in common shares. In addition, the Executive
Board may, subject to the approval of the Supervisory Board, decide to give shareholders the option to elect to receive a distributionas a cash payment or as a payment in common shares. In all cases distribution will be made out of the profit and/or the reserves.
It is proposed to the annual General Meeting of Shareholders on April 22, 2004, to pay a dividend for the year 2003 of EUR 0.40 percommon share of EUR 0.12 par value, which after taking into account the EUR 0.20 interim dividend, leads to a final dividend ofEUR 0.20 per common share.
It is also proposed that the final dividend will be made available entirely in cash or entirely in stock, at the option of the shareholder.The value of the stock dividend will be approximately 5% higher than the value of the cash dividend and will be paid out of the paid-insurplus fund. The period during which shareholders can elect is from April 26 up to and including May 3, 2004.
In order to fully reflect the prevailing market price of AEGON N.V. common shares within the indication provided, the number ofdividend coupons that gives entitlement to a new common share of EUR 0.12 will be determined on May 10, 2004, after 5.30 p.m., based upon the average share price (quotation Euronext Amsterdam) in the five trading days from May 4 up to and includingMay 10, 2004.
In accordance with article 32, paragraph 3 of the Articles of Incorporation, a dividend equal to 4.5% of the paid up amount of thepreferred stock will be distributed in cash.
Upon approval of this proposal, profit will be appropriated as follows:
2003
Dividend on preferred shares 95
Interim dividend on common shares (cash portion) 147
Final dividend on common shares (cash portion) 297
Earnings to be retained 1,254
NET INCOME 1,793
SUBSEQUENT EVENTS
On January 2, 2004, AEGON closed the acquisition of a 45% participation in Unirobe, a group of insurance intermediary companies inthe Netherlands.
On August 5, 2003, AEGON announced an agreement to sell most of the commercial lending business of Transamerica FinanceCorporation (TFC) to GE Commercial Finance. The sale price of approximately USD 5.4 billion resulted in an after-tax book gain of around USD 200 million. On January 14, 2004, the transaction was closed and the book gain will be added directly to shareholders’equity in 2004.
On January 28, 2004, AEGON announced that it had reached final agreement on a strategic partnership with Caja de Ahorros delMediterráneo (CAM), a large savings bank in Spain. The agreement comprises the establishment of a new Spanish holding company,which will be owned 50.01% by CAM and 49.99% by AEGON. CAM will contribute 100% of its insurance subsidiary Mediterráneo Vida tothe holding company and provide exclusive access to its customer base through its network of 851 branches. AEGON will contributeEUR 150 million in cash to the holding company and an additional EUR 250 million in high quality financial assets. At the end of the fifthyear, the final consideration for the insurance subsidiary will be determined on the basis of achieved performance and according to apre-agreed formula. After the tenth year, parties have agreed to reassess the legal structure in place and both have the right to unwindthe holding company without terminating the partnership. If it is decided to unwind the holding company, CAM and AEGON each will own50% of the life insurance company directly. The EUR 250 million in high quality financial assets plus accrued investment income willreturn to AEGON. The remainder of the assets of the holding company will be transferred to CAM. The partnership is subject toregulatory approval. The participation in the joint venture will be recognized as net asset value under group companies andparticipations.
AEGON GROUP ANNUAL REPORT 2003 142
VERENIGING AEGON
Vereniging AEGON is the continuation of the former mutual insurer AGO. In 1978, AGO demutualized and Vereniging AGO became theonly shareholder of AGO Holding N.V., which was the holding company for its insurance operations. In 1983, AGO Holding N.V. andEnnia N.V. merged into AEGON N.V. Vereniging AGO initially received approximately 49% of the common shares (which gradually wasreduced to less than 40%) and all of the preferred shares in AEGON N.V., giving it voting majority in AEGON N.V., and changed its nameinto Vereniging AEGON.
The objective of Vereniging AEGON is the balanced representation of the interests of AEGON N.V. and all of its stakeholders,including shareholders, AEGON group companies, insured parties, employees and other relations of the companies.
In accordance with the 1983 Merger Agreement, Vereniging AEGON had certain option rights on preferred shares to prevent dilutionof voting power as a result of new share issuances by AEGON N.V. This enabled Vereniging AEGON to maintain voting control at theGeneral Meeting of Shareholders of AEGON N.V. In September 2002, AEGON N.V. effected a non-dilutive capital restructuring wherebyVereniging AEGON sold 350,000,000 of its common shares, of which 143,600,000 common shares were sold directly by VerenigingAEGON in a secondary offering outside the United States and 206,400,000 common shares were purchased by AEGON N.V. fromVereniging AEGON. AEGON N.V. subsequently sold these common shares in a global offering. The purchase price for the 206,400,000common shares sold by Vereniging AEGON to AEGON N.V. was EUR 2,064,000,000, which amount Vereniging AEGON contributed asadditional paid-in capital on the existing AEGON N.V. preferred shares, all held by Vereniging AEGON. As a result of these transactions,Vereniging AEGON’s beneficial ownership interest in AEGON N.V.’s common shares decreased from approximately 37% to approximately12% and its beneficial ownership interest in AEGON N.V.’s voting shares (excluding issued common shares held in treasury byAEGON N.V.) decreased from approximately 52% to approximately 33%.
On May 9, 2003, AEGON’s shareholders approved certain changes to AEGON’s corporate governance structure and AEGON’srelationship with Vereniging AEGON in an extraordinary General Meeting of Shareholders. AEGON’s Articles of Incorporation weresubsequently amended on May 26, 2003. The relationship between Vereniging AEGON and AEGON N.V. was changed as follows:
• The 440,000,000 preferred shares with nominal value of EUR 0.12 held by Vereniging AEGON were converted into 21 1,680,000 newclass A preferred shares with nominal value of EUR 0.25 and the paid-in par capital on the preferred shares was increased byEUR 120,000 to EUR 52,920,000. The voting rights pertaining to the new preferred shares (the class A preferred shares as well asthe class B preferred shares which may be issued to Vereniging AEGON under the option agreement as discussed below) wereadjusted accordingly to 25/12 vote per preferred share.
• AEGON N.V. and Vereniging AEGON have entered into a preferred shares voting rights agreement, pursuant to which VerenigingAEGON has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead, Vereniging AEGON hasagreed to exercise one vote only per preferred share, except in the event of a ’special cause’, such as the acquisition of a 15%interest in AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of personswhether individually or as a group, other than in a transaction approved by the Executive Board and the Supervisory Board. If, in its sole discretion, Vereniging AEGON determines that a ’special cause’ has occurred, Vereniging AEGON will notify the GeneralMeeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
• AEGON N.V. and Vereniging AEGON have amended the option arrangements under the 1983 Merger Agreement. Under the amendedoption arrangements Vereniging AEGON, in case of an issuance of new shares by AEGON N.V., has the right to have issued to it asmany class B preferred shares as shall enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of totalvoting shares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. OnSeptember 19, 2003, and December 29, 2003, Vereniging AEGON exercised its option rights following the dilution caused by the stockdividend issuances of AEGON N.V. and acquired 10,220,000 respectively 880,000 class B preferred shares at par value to correct this dilution.
Development of shareholding in AEGON N.V. Common Preferred A Preferred B
NUMBER OF SHARES
As of January 1, 2003 171,974,055 211,680,000
Stock dividend 2002 received 6,878,962
Exercise option right Pref B shares 10,220,000
Sale of stock, offering price of EUR 9.72 per share (6,878,962)
Interim stock dividend 2003 received 3,070,965
Exercise option right Pref B shares 880,000
Sale of stock, offering price of EUR 1 1.6536 per share (3,070,965)
AS OF DECEMBER 31, 2003 171,974,055 211,680,000 11,100,000
AEGON GROUP ANNUAL REPORT 2003 143
MAJOR SHAREHOLDERS
Accordingly, under normal circumstances the voting power of Vereniging AEGON, based on the number of outstanding and voting shares(excluding issued common shares held in treasury by AEGON N.V.) at December 31, 2003, amounts to approximately 23%. In the event ofa ’special cause’, Vereniging AEGON’s voting rights will increase to currently 32.60% for up to six months per ’special cause’.
At December 31, 2003 the General Meeting of Members of Vereniging AEGON consisted of 21 members. The majority of the votingrights is with nineteen of the members not being employees or former employees of AEGON N.V. or one of the AEGON group companies,nor current or former members of the Supervisory Board or the Executive Board of AEGON N.V. The two other members are both electedby the General Meeting of Members from among the members of the Executive Board of AEGON N.V.
Vereniging AEGON has an Executive Committee consisting of seven members, five of whom, including the chairman and the vice-chairman, are not nor have ever been, related to the AEGON group. The other two members are also member of the Executive Board ofAEGON N.V. When a vote in the Executive Committee results in a tie, the General Meeting of Members has the deciding vote.
The annual report 2003 of Vereniging AEGON and further information may be obtained through the Secretary (telephone: +31 703448288, e-mail: [email protected], fax: +31 70 3477929).
OTHER MAJOR SHAREHOLDERS
Based on Schedule 13G as amended February 13, 2004, filed with the SEC by Capital Group International, Inc. on behalf of itself andcertain of its wholly-owned subsidiaries (Capital International Limited, Capital International S.A., Capital International Research andManagement, Inc. dba Capital International, Inc., and Capital Guardian Trust Company), Capital Group International may be deemed to bethe beneficial owner of 142,329,520, or approximately 9.4%, of AEGON’s outstanding common shares at December 31, 2003, as a resultof its being the parent holding company of a group of investment management companies that hold investment power and, in somecases, voting power over these common shares. The Schedule 13G further reports that Capital Group International, Inc. does not itselfhave investment power or voting power over these common shares. The Schedule 13G also reports that Capital Guardian Trust Companyis deemed to be the beneficial owner of 89,172,310, or approximately 5.9%, of AEGON’s outstanding common shares at December 31,2003, as a result of its serving as the investment manager of various institutional accounts. Both Capital Group International, Inc. andCapital Guardian Trust Company disclaimed beneficial ownership of the common shares in the Schedule 13G pursuant to Rule 13d-4under the Securities Exchange Act of 1934.
AEGON GROUP ANNUAL REPORT 2003 144
AUDITOR’S REPORT
INTRODUCTION
We have audited the financial statements of AEGON N.V., The Hague, for the year 2003. These financial statements are the responsibilityof the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
SCOPE
We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
OPINION
In our opinion, the financial statements give a true and fair view of the financial position of the company as at December 31, 2003, andof the result for the year then ended in accordance with accounting principles generally accepted in the Netherlands and comply withthe financial reporting requirements included in Part 9, Book 2 of the Netherlands Civil Code.
THE HAGUE, MARCH 11, 2004
ERNST & YOUNG ACCOUNTANTS
AEGON GROUP ANNUAL REPORT 2003 145
ADDITIONAL INFORMATION
INFORMATION BASED ON U.S. ACCOUNTING PRINCIPLES
The consolidated financial statements of AEGON N.V. have been prepared in accordance with Dutch accounting principles which differ incertain respects from those generally accepted in the United States (US GAAP). The following information is a summary of the effect onAEGON’s shareholders’ equity and net income of the application of US GAAP, which is included in further detail in the Form 20-F reportfiled with the Securities and Exchange Commission. The Form 20-F report is available on request, free of charge, and can also beretrieved from the EDGAR database of the SEC at www.sec.gov and via www.aegon.com.
Shareholders’equity
December 31, Net incomeAmounts in EUR millions 2003 2002 2003 20021 20011
Amounts in accordance with Dutch accounting principles 14,132 14,231 1,793 1,547 2,397
Realized gains and (losses) on shares and real estate includingreversal of indirect return — — (756) (2,251) (1,160)
Derivatives (239) (750) 90 32 (152)
Deferred taxation (670) (651) (33) (30) 44
Deferred taxation on US GAAP adjustments (671) (489) (72) 205 344
Balance of other items 9 (12) 228 329 (410)
AMOUNTS DETERMINED IN ACCORDANCE WITH US GAAP 17,836 17,554
Income before cumulative effect of accounting changes 1,531 (1,033) 686
Cumulative effect of adopting FAS 133 (derivatives), net of tax of EUR 30 million — — (54)
Cumulative effect of adopting FAS 142 (goodwill) — (1,295) —
NET INCOME IN ACCORDANCE WITH US GAAP 1,531 (2,328) 632
Other comprehensive income, net of tax:Foreign currency translation adjustments (2,384) (2,749) 690
Unrealized gains and (losses) on available for sale securities during the period 1,249 (673) (907)
Reclassification adjustment for (gains) and losses included in net income 7 1,193 377
Cumulative effect of accounting change of adopting FAS 133 — — 49
COMPREHENSIVE INCOME IN ACCORDANCE WITH US GAAP 403 (4,557) 841
1Reflects restatement of certain US GAAP information.AEGON identified certain changes required to be made to figures presented in accordance with US GAAP for the years ended December 31, 2002, and December 31, 2001. US GAAP net income over 2002 decreased by EUR 98 million, US GAAP comprehensive income for 2002 was EUR 155 million lower and, for 2001 was EUR 297 million lower. None of the changes affected any income or balance sheet figures presented in accordance with Dutch accounting principles.
In 2003 major differences between amounts on Dutch accounting principles and those on US GAAP compared to the amounts ofprior years are explained as follows:
Net income of EUR 1,531 million was reported for 2003 based on US GAAP, compared to a net loss of EUR 2,328 million for 2002. Capital losses on shares and real estate realized on a US GAAP basis totaled EUR 125 million (including EUR 352 million ’other-than-
temporary impairment’ write downs in 2003 compared to an amount of EUR 1,057 million in 2002) compared to indirect income of EUR631 million under Dutch accounting principles. Capital gains (losses) on shares and real estate are recognized when they are realizedpursuant to US GAAP while the indirect income methodology is applied under Dutch accounting principles.
Capital gains and losses on bonds and private placements realized, less the amortization charge of deferred gains and losses, totaledEUR 893 million for the year ended December 31, 2003 (2002: EUR 8 million). Under Dutch accounting principles gains and losses aredeferred and amortized to the income statement over future periods. Under US GAAP these gains and losses, together with the annualamortization charge, are reported in the income statement when they are realized.
AEGON GROUP ANNUAL REPORT 2003 146
Goodwill impairment charges are recorded on a US GAAP basis while goodwill is charged to equity on a Dutch accounting basis at thetime of acquisition. The required annual goodwill impairment test under SFAS 142 was performed in the fourth quarter of 2003 andresulted in an additional goodwill impairment charge of EUR 219 million, mainly in the Transamerica non-insurance reporting unit (2002: EUR 1,965 million). This impairment charge was reported as a 2003 US GAAP operating expense.
The following is a summary of differences between Dutch accounting principles and US GAAP which have an impact on reportedshareholders’ equity or net income.
REAL ESTATE
Under Dutch accounting principles real estate is shown at market value, which is the selling-value under normal market circumstances.New property is valued at construction cost including interest during the construction period, or at purchase price. Unrealized andrealized gains and losses on real estate investments as well as results, expenses and currency exchange rate differences from hedgingtransactions are recognized in the revaluation account, taking into account the related (deferred) taxes.
Under US GAAP real estate is carried at historical cost less accumulated depreciation and is adjusted for any impairment in value.Depreciation is provided over the estimated economic life of the property. Realized gains or losses and all other operating income andexpenses are reported in the income statement.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the reduction from market value to thehistorical cost less depreciation.
The adjustment shown in the reconciliation in the net income column represents the annual depreciation charge. The differences inresults on disposals arising from the difference in book value between Dutch accounting principles and US GAAP are shown in the linerealized gains and losses on shares and real estate, as is the reversal of the indirect income.
BONDS AND PRIVATE PLACEMENTS - VALUATION
Under Dutch accounting principles bonds and private placements are shown at amortized cost less provisions for uncollectable amounts,representing the cash value at the balance sheet date of future interest and principal repayment components based on the effectiveinterest rate on the date of acquisition.
Under US GAAP debt securities are classified in three categories and accounted for as follows:
• debt securities that the company has the intent and ability to hold to maturity are classified as held-to-maturity securities andreported at amortized cost;
• debt securities that are bought and held principally for the purpose of selling them in the near term are classified as tradingsecurities and reported at market value, with unrealized gains and losses included in earnings;
• debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securitiesand reported at market value, with unrealized gains and losses reported in shareholders’ equity.
AEGON has classified the vast majority of its debt securities as available-for-sale securities and the remainder as trading securities.Under US GAAP, when evidence indicates there is a decline in a debt security’s value, which is other than temporary, the security iswritten down to fair value and the difference is charged to that year’s earnings.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the difference between the amortized costbasis less write-downs for uncollectable amounts and the market value.
BONDS AND PRIVATE PLACEMENTS - REALIZED GAINS AND LOSSES
Under Dutch accounting principles realized gains and losses from transactions within the bonds and private placements portfolios, unlessa loss is considered a default loss, are deferred and released to the income statements in annual installments over the estimated averageremaining maturity term of the investments sold.
Under US GAAP realized gains and losses on sales of bonds and private placements are recorded in earnings in the period the salesoccurred. Gains and losses, both realized and unrealized, on bonds and private placements classified as trading are included in netincome.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the reclassification of the deferred resultson the sale of bonds from liabilities to shareholders’ equity.
The adjustment shown in the reconciliation in the net income column represents the difference between the release of the deferredresults on a Dutch accounting principles basis and the realized results on a US GAAP basis.
AEGON GROUP ANNUAL REPORT 2003 147
ADDITIONAL INFORMATION
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Under Dutch accounting principles, policy acquisition costs, which are costs that are directly or indirectly related to the acquisition ofnew or renewal insurance contracts, are deferred to the extent that they are recoverable from future expense charges in the premiumsor from expected gross profits, depending on the nature of the contract. Acquisition costs are also deferred for certain non-insuranceinvestment type products related to 401(k) plans in the United States. Deferred policy acquisition costs (DPAC) are amortized over thelife of the underlying contracts, which are periods not to exceed the premium-paying periods for fixed premium products (traditional lifeand fixed universal life) and for flexible premium insurance contracts and investment type contracts in proportion to the emergence ofestimated gross profits.
For fixed premium products in all countries, the DPAC are tested at least annually by country unit and product line to assess therecoverability. The amount not recoverable is recognized as an expense in the income statement in the period of determination. In theUnited States and Canada, the DPAC on flexible premium products, including fixed and variable annuities, variable universal life and unit-linked contracts, are amortized at a constant rate based on the present value of the estimated gross profit amounts expected to berealized over the life of the policies. If appropriate, the assumptions included in the determination of estimated gross profits areadjusted. A significant assumption related to estimated gross profits on variable annuities and life insurance products is the annual long-term net growth rate of the underlying assets. The reconsideration of assumptions may affect the original DPAC amortization schedule,referred to as DPAC unlocking. The difference between the original DPAC amortization schedule and the revised schedule, which is basedupon actual gross profits earned to date and revised estimates of future gross profits, is recognized in the income statement as anexpense or a benefit. In the Netherlands, the United Kingdom and Other Countries the impact of equity market movements on estimatedgross profits on flexible premium products is covered by the yearly or, if appropriate, quarterly recoverability testing; a negative outcomeis charged to the income statement in the period of determination. If appropriate, the assumptions included in the determination ofestimated gross profits are adjusted for future periods.
For fixed premium products, the accounting is the same under US GAAP as under Dutch accounting principles in all countries. Forflexible premium products sold in the United States and Canada, the accounting under US GAAP is the same as under Dutch accountingprinciples. For flexible premium products sold in the Netherlands, the United Kingdom and Other Countries an unlocking adjustment ismade using a revised DPAC amortization schedule based on actual gross profits earned to date and revised estimates of future grossprofits. In recent years this unlocking adjustment has resulted in an additional amortization expense. Acquisition costs related to non-insurance investment type products related to 401(k) plans in the United States are expensed as incurred, as opposed to being deferredand amortized in accordance with Dutch accounting principles.
The adjustment in the reconciliation in the shareholders’ equity column and the adjustment in the reconciliation in the net incomecolumn include the effect of unlocking for DPAC on flexible premium products in the United Kingdom and the difference in accountingfor acquisition costs related to non-insurance investment type products related to 401(k) plans in the United States. Also included, inaccordance with practice subsequent to the issuance of SFAS 1 15, is the adjustment of DPAC to reflect the change in amortization thatwould have been necessary if unrealized investment gains or losses related to debt securities had been realized. The effect on US GAAPequity related to SFAS 1 15 is EUR (1,421) million (2002: EUR (1,027) million).
GOODWILL
Under Dutch accounting principles goodwill is charged to shareholders’ equity in the year of acquisition.Under US GAAP goodwill is capitalized and prior to January 1, 2002, goodwill was amortized over the expected periods to be
benefited with adjustments for impairment, if necessary. For US GAAP accounting purposes goodwill was amortized over various periods,not exceeding 20 years for years prior to 2002. Goodwill was tested for impairment based on undiscounted cash flows.
Pursuant to the adoption of SFAS 142, ’Goodwill and Other Intangible Assets’ as of January 1, 2002, goodwill is reviewed and testedfor impairment under a fair value approach. Goodwill must be tested for impairment at least annually, or more frequently as a result ofan event or change in circumstances that would indicate an impairment may be necessary. Impairment testing requires thedetermination of the fair value for each of the identified reporting units. The reporting units identified for AEGON based upon the SFAS142 rules include: AEGON USA, AEGON Canada, AEGON The Netherlands, AEGON UK insurance companies and AEGON UK distributioncompanies, Other Countries and Transamerica non-insurance businesses. The fair value of the insurance operations is determined usingvaluation techniques consistent with market appraisals for insurance companies, a discounted cash flow model requiring assumptions asto a discount rate, the value of existing business and expectations with respect to future growth rates and term. For the Transamericanon-insurance operations, fair value was determined using a discounted cash flow analysis. The valuation utilized the best availableinformation, including assumptions and projections considered reasonable and supportable by management. The assumptions used inthe determination of fair value involve significant judgements and estimates. The discount rates used are believed to represent marketdiscount rates, which would be used to value businesses of similar size and nature.
The goodwill write-down in 2002 primarily reflects impairments for Transamerica non-insurance operations amounting to EUR 1,234million and for AEGON USA insurance operations.
AEGON GROUP ANNUAL REPORT 2003 148
TECHNICAL PROVISIONS
The provision for life insurance represents the present value of future benefits to be paid to or on behalf of policyholders and relatedexpenses less the present value of future net premiums. The provision is calculated using actuarial methods that include assumptionssuch as estimates of premiums, mortality, investment performance, lapses, surrenders and expenses. These assumptions are initiallybased on best estimates of future experience at policy inception date, in some instances taking into account a margin for the risk ofadverse deviation. The assumptions used are regularly reviewed, compared to actual experience and, if necessary, depending on the typeof products, updated.
For products that have guaranteed benefits over the lifetime of the policy or at maturity, the premiums also include loadings for theexpected cost of the guarantee. The pricing of the guarantee is based on assumptions for future investment performance, includingreinvestment assumptions.
The provision for life insurance also comprises the provision for unexpired risks as well as the provision for claims outstanding. Incase the premium-paying period is shorter than the lifetime of the policy, a provision for future expenses is set up to cover anyestimated future expenses after the premium-paying period. Future costs in connection with benefit payments are also provided for.
In various countries products are sold that contain minimum guarantees. For these products the regular technical provision isrecognized under technical provisions with investments for account of policyholders. The technical provision life insurance includesprovisions for guaranteed minimum benefits related to contracts where the policyholder otherwise bears the investment risk.
In the United States, a common feature in variable annuities is a guaranteed minimum death benefit (GMDB). This means that whenthe insured dies, the beneficiaries receive either the account balance or the guaranteed amount, whichever is higher. The latter iscalculated using the total deposits made by the contract holder, less any withdrawals and sometimes includes a roll-up or step-up featurethereby increasing the guarantee with interest or with increases in the account value, respectively.
The provision for life insurance includes a provision in connection with the guarantees issued. A cap and a floor for this provision iscalculated using stochastic prospective methods (probability weighted calculation using multiple future scenarios) and currentassumptions. Within the cap and floor corridor, the accrual method based on pricing assumptions with valuation interest less actualclaims incurred is followed. Outside the cap and floor corridor, a surplus or shortfall of the provision will cause an extra charge or creditto the income statement.
In Canada, the variable annuity products sold are known as segregated funds. The provisions for the minimum guarantees onsegregated funds are established consistent with the method described for the minimum guarantees on the variable annuity contractssold in the United States.
In the Netherlands, Fundplan policies have a guaranteed return of 3% or 4% at maturity or upon the death of the insured if premiumpaid for a consecutive period of ten years is invested in the Mix Fund and/or the Fixed Income Fund. For this guaranteed return aprovision is established based on stochastic modelling. The provision is developed applying the accrual method based on pricingassumptions less actual claims incurred. A corridor for the provision is determined regularly based on stochastic modelling methods. Ifthe provisions develop outside the corridor, a charge or credit to the income statement is recorded. Minimum interest guarantees ongroup pension contracts in the Netherlands are given for nominal benefits, based on the 3% or 4% actuarial interest, after retirement ofthe employees. Due to the nature of the product, these guarantees have a long-term horizon of about 30 to 60 years. The provision isdeveloped applying the accrual method based on pricing assumptions less actual deductions.
Provisions for fixed annuities, guaranteed investment contracts (GICs) and funding agreements (FAs) are equal to the accumulatedcontract balance.
Under US GAAP the technical provisions for traditional life insurance contracts are computed using the net level premium methodwith investment yields, mortality, lapses and expenses based on historical assumptions, and include a provision for adverse deviation. Foruniversal life contracts and investment type contracts (annuities) the technical provisions are equal to the policyholder account balancesat the balance sheet date. The technical provision in the United Kingdom is reduced to equal the contract holder balance. The technicalprovision for fixed annuities, GICs and FAs is the same as under Dutch accounting principles.
Also US GAAP technical provisions include the part of the change in value of the debt securities that must be allocated topolicyholders based on the effects of the application of SFAS 1 15. The SFAS 1 15 effect on US GAAP equity is EUR (300) million (2002: EUR (348) million).
In addition, to the extent that the contract contains an embedded derivative as defined by US GAAP, the contract is unbundled andthe derivative is marked to fair value with changes recognized in the income statement. This adjustment is included in the derivative linein the reconciliation.
AEGON GROUP ANNUAL REPORT 2003 149
ADDITIONAL INFORMATION
REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE
Realized and unrealized gains and losses on shares and real estate, under Dutch accounting principles, are recognized in the revaluationaccount, taking into account the related (deferred) taxes. In the income statement the structural total return on investments in sharesand real estate is recognized. The total return includes the realized direct income (rents and dividends) of the reporting period and anamount of indirect income. The total return is calculated by determining the average of the total return yield over the last 30 years andmultiplying this average yield by the average value of these investments over the last 7 years, adjusted for investment purchases andsales.
The indirect income from these investments is then calculated as the difference between the total return and the realized directincome. The indirect income is released from the revaluation account, if and as far as each of the individual balances for shares and realestate are positive.
Under US GAAP realized gains and losses on sales of shares and real estate are recorded in earnings in the period in which the salesoccurred. Gains and losses, both realized and unrealized, on shares classified as trading are included in net income. For non-tradingshares, unrealized gains and losses are reported as a component of comprehensive income. Impairments in value of shares deemed to beother than temporary are reported as a component of realized gains and losses. Real estate impairment is recognized as a realized lossin the income statement.
Realized and unrealized gains and losses by their nature can show large fluctuations. Included in realized gains and losses on sharesand real estate for US GAAP purposes are EUR 273 million (2002: EUR 1,057 and 2001: EUR 36 million) impairment losses due to another than temporary decline in market value, and the reversal of the indirect return of EUR 631 million (2002: EUR 758 million and 2001: EUR 723 million).
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DERIVATIVES
AEGON uses common derivative financial instruments such as swaps, options, futures and cross-currency derivatives to hedge itsexposures related to investments, liabilities and borrowings. In general, under Dutch accounting principles the accounting treatment ofderivatives mirrors the accounting treatment of the underlying financial instrument. In the balance sheet, the book values of thederivatives are recognized under the captions of the related underlying financial instrument. Foreign currency amounts are converted atthe year-end exchange rates. Realized and unrealized results on derivative financial instruments are recognized in the same period andlikewise as the results of the related investments, liabilities and debt.
US GAAP requires that all derivatives, including embedded derivatives, be recognized as either assets or liabilities in the balancesheet and be measured at fair value. Derivatives that do not qualify for hedge accounting treatment under US GAAP must be adjusted tofair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives willeither be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through income or recognized inother comprehensive income and amortized to income when the hedged transaction impacts income. Any portion of a derivative’schange in fair value determined to be ineffective at offsetting the hedged risk will be immediately recognized in income. An EUR 5 million loss on the total return swaps with Vereniging AEGON was included in 2003 net income in the line derivatives.
DEFERRED TAXATION
Under Dutch accounting principles deferred taxation is calculated on the basis of the difference between book value and valuation fortax purposes of the appropriate assets and liabilities. The provision is equal to the discounted value of the future tax amounts. In thecalculation discounted tax rates ranging from 0% to nominal rates are used, taking into account the estimated term to maturity of therelated differences.
US GAAP requires an asset and liability approach for financial accounting and reporting for income taxes. Deferred tax assets andliabilities are measured using those enacted tax rates expected to apply to taxable income in the periods in which the deferred tax assetor liability is expected to be realized or settled and such tax rates are not discounted. Deferred tax assets are reduced, if necessary, by avaluation allowance to reflect the fact that (part of) the assets are not expected to be realized.
BALANCE OF OTHER ITEMS
Certain items are recorded differently or in different periods on the two bases of accounting.
Comprehensive income is the change in shareholders’ equity during the year from transactions and other events and circumstancesfrom non-owner sources. It includes all changes in shareholders’ equity during the year except those resulting from investments byowners and distributions to owners.
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QUARTERLY RESULTSAmounts in millions
2003 USD 2003 EURI II III IV Total I II III IV Total
0.8724 0.9824 0.9860 1.0487 At end of period0.8758 0.8974 0.9280 0.9468 Weighted average rate
AEGON GROUP ANNUAL REPORT 2003 153
CORPORATE AND SHAREHOLDER INFORMATION
HEADQUARTERS
AEGON N.V.AEGONplein 50P.O. Box 2022501 CE The HagueThe NetherlandsTelephone: +31 70 344 32 10Internet: http://www.aegon.comE-mail: [email protected]
STOCK EXCHANGE LISTING
The common shares of AEGON N.V. are quoted on stockexchanges in:
• Amsterdam (AEGN.AS)
• Frankfurt (AEGN.F)
• London (AEGNq.L)
• New York, NYSE (AEG.N)
• Tokyo (AEGON.T)
• Zurich (AEGN.S)
AEGON N.V. stock options are quoted at the EuronextAmsterdam, the Chicago Board Options Exchange and thePhiladelphia Stock Exchange.
ANNUAL MEETING
The AEGON N.V. annual General Meeting of Shareholders will be held at AEGON headquarters, AEGONplein 50, The Hague, the Netherlands, on Thursday April 22, 2004, at 14.00 C.E.T.
SHAREHOLDERS AND INVESTOR RELATIONS CONTACTS
THE NETHERLANDS
AEGON N.V.P.O. Box 2022501 CE The HagueThe Netherlands
January 15 ICA Ahold and AEGON end talks on joint ventureMarch 6 Release results year 2002March 20 AEGON announces proposed changes to its corporate governance
April 16 AEGON N.V. issues 4 5⁄8% EUR 1 billion five year EurobondsApril 17 Annual General Meeting of ShareholdersMay 6 Release results first three months 2003May 6 AEGON-CNOOC life insurance company starts activities in ChinaMay 6 Extraordinary General Meeting of ShareholdersMay 9 AEGON concludes change in corporate governance May 20 AEGON N.V. issues 4.75% USD 750 million ten year senior notesMay 20 AEGON N.V. issues USD 250 million two year floating rate senior notes
June 3 AEGON receives license for life insurance activities in Slovakia August 5 AEGON announces to sell most of Transamerica Finance Corporation’s commercial lending business to
GE Commercial FinanceAugust 7 Release results first six months 2003August 7 AEGON discloses its embedded value 2002
October 2 Sale of Transamerica Finance Corporation’s real estate tax services and flood hazard companies to The First American Corporation concluded
October 29 AEGON opens life insurance operations in SlovakiaNovember 6 Release results first nine months 2003November 26 CAM and AEGON announce to agree on partnership
IMPORTANT DATES 2004
April 22 Annual General Meeting of ShareholdersApril 23 Dividend record dateApril 26 Ex-dividend date in the Netherlands;
start of election period for cash or stock option final dividend 2003April 21 Ex-dividend date in the USAMay 4 Calculation period for dividend value in shares (up to and including May 10)May 12 Release results first three months 2004May 18 Start payment of final dividend 2003
June 7 Release embedded value reportAugust 12 Release results first six months 2004August 13 Interim dividend record date
September 24 Interim dividend payableNovember 1 1 Release results first nine months 2004
AEGON GROUP ANNUAL REPORT 2003 155
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report that are nothistorical facts are forward-looking statements as defined in theUS Private Securities Litigation Reform Act of 1995. Words suchas ’believe’, ’estimate’, ’intend’, ’may’, ’expect’, ’anticipate’,’predict’, ’project’, ’counting on’, ’plan’, ’continue’, ’want’,’forecast’, ’should’, ’would’, ’is confident’ and ’will’ and similarexpressions as they relate to us are intended to identify suchforward-looking statements. These statements are notguarantees of future performance and involve risks,uncertainties and assumptions that are difficult to predict. Weundertake no obligation to publicly update or revise anyforward-looking statements. Readers are cautioned not to placeundue reliance on these forward-looking statements, whichspeak only as of their dates. All forward-looking statements aresubject to various risks and uncertainties that could causeactual results to differ materially from expectations, including,but not limited to, the following:
• changes in general economic conditions, particularly in theUnited States, the Netherlands and the United Kingdom;
• changes in the performance of financial markets, includingemerging markets, including:
• the frequency and severity of defaults by issuers in ourfixed income investment portfolios; and
• the effects of corporate bankruptcies and/or accountingrestatements on the financial markets and the resultingdecline in value of securities we hold;
• the frequency and severity of insured loss events;
• changes affecting mortality, morbidity and other factors thatmay affect the profitability of our insurance products;
• changes affecting interest rate levels and continuing lowinterest levels;
• changes affecting currency exchange rates, including theeuro/US dollar and euro/UK pound exchange rates;
• increasing levels of competition in the United States, theNetherlands, the United Kingdom and emerging markets;
• changes in laws and regulations, particularly those affectingour operations, the products we sell and the attractivenessof certain products to our consumers;
• regulatory changes relating to the insurance industry in thejurisdictions in which we operate;
• acts of God, acts of terrorism and acts of war;
• changes in the policies of central banks and/or foreigngovernments;
• litigation or regulatory action that could require us to paysignificant damages or change the way we do business;
• customer responsiveness to both new products anddistribution channels;
• competitive, legal, regulatory or tax changes that affect thedistribution cost of or demand for our products; and
• our failure to achieve anticipated levels of earnings oroperational efficiencies as well as other cost savinginitiatives.
